Russia's central bank says even $80 oil is not a problem

By bne IntelliNews November 10, 2014

bne -


Russia's Central Bank (CBR) says even a price of $80 per barrel of oil is not a problem for the economy because the consequent depreciation of the currency buoys export revenues. 

Currently oil is trading at close to $85 but the CBR's main forecast for next year is a price of $95, falling to $92 by 2017. 

In its economic outlook for the next two years released on November 10,  the CBR has become increasingly pessimistic on Russia's economic development, but falling oil prices are not the problem, Central Bank First Deputy Chair Kseniya Yudayeva told journalists. 

Accounting for well over half of the government's tax revenues, falling oil prices hits the state in the pocket. However, as Alfa Bank showed in a note last week, lower oil prices also cause the ruble to depreciate, offsetting much of the pain as far as the budget is concerned.  Oil prices have fallen by about 20% this year, but the value of the ruble has fallen by some 24% against its basket of currencies over the same period. 

That means the government is one of the biggest winners from devaluation, because when it converts petrodollar revenue,s it gets significantly more (albeit less valuable) rubles. The upshot is that by allowing the ruble to float freely, the economy is able to absorb the shock of falling oil prices in a way that it could not in the 1990s when the ruble exchange rate was held in a narrow trading band and the central bank burned up hard currency reserves supporting the artificial exchange rate. 

The CBR has abandoned a suggestion to stress test the economy in a scenario where the oil price is $60. It said it is confident oil will not fall below $80 through to 2017, the bank said in a statement on Monday.

Its most pessimistic scenario is an  $80 oil price, together with sanctions imposed by the European Union and US remaining in place for another two years. 

The CBR also raised its capital outflow forecast for 2014 to $128bn against the earlier predicted $90bn. The bulk of the outflows happened in the first half of this year and capital flight has been easing somewhat in recent months, but has picked up again more recently. 

The bank was more upbeat on its fight against inflation, saying it could bring inflation down to 6-6.5% in 2015 and to 4-4.6% to the end of 2017, Yudayeva said.

"The central bank has instruments it can use in any development of events to gradually lower inflation to 4.0-4.6% by the end of 2017, and approximately 6.0-6.5% in 2015,” Yudayeva said, reported Bloomberg. 

Yudayeva said Russia’s economy would grow by more than 3% under favorable conditions, but even if conditions turned negative, the economy would still grow in 2017. But only just – according to Alfa Bank's estimates each $10 decrease in the cost of oil cuts 0.4% off GDP growth, which means at $80 oil Russia's economy would be growing but only just.

The main question is, will the budget still break even at $80 oil or go into deficit for the first time in 14 years? The devaluation effect of the ruble has already reduced the breakeven price for the budget from $114 in 2013 to $100.1 now. Earlier this year Renaissance Capital predicted that at $80 oil growth Russia's economy would contract by 1.7% and the budget deficit would become 1.9% of GDP.

However, both Alfa Bank and the CBR are considerably more optimistic, with both predicting flat, or slight growth, and a budget deficit of well under 1%. The difference is due to the fact that the ruble has already fallen a lot faster than expected. The Renaissance Capital estimates are based on a ruble exchange rate of RUB42 to the dollar with $80 oil, but the ruble has already fallen close to slightly less than RUB50 to the dollar with $85 oil. 

The devaluation effect helps by killing off imports, which will have a strong positive impact on the balance of payments. Alfa bank predicted that even at $80 oil and a ruble exchange rate of RUB46 to the dollar, Russia will still earn some $90bn surplus from oil exports – way ahead of Renaissance Capital's $19bn assumption at the same price – offsetting almost all the expected capital flight.

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