Russia’s war economy boosted by rising oil prices

Russia’s war economy boosted by rising oil prices
The combination of OPEC’s voluntary production cuts and fears of a region-wide war in the Middle East have pushed up oil prices to over $90 in an increasingly tight market. / bne IntelliNews
By bne IntelliNews April 16, 2024

Brent crude oil prices remained near a six-month high this week, hovering around $90 per barrel amidst fears of an oil price spike driven by escalating geopolitical tensions in the Middle East, Liam Peach, an emerging market economist with Capital Economics said in a note on April 16.

“For most economies in Emerging Europe, higher oil prices present challenges to the near-term outlook by weakening countries’ terms of trade and pushing up inflation,” said Peach.

Most countries in the region have seen their current account positions improve over the past year, shifting from deficits to surpluses. However, Turkey and Romania continue to face large current account deficits, and the rising cost of energy imports may hinder efforts to reduce these gaps.

On the inflation front, a recent analysis suggested that higher oil prices are likely to exacerbate inflation across Central and Eastern Europe. The report projected that inflation could climb to around 5% in Poland and Hungary by the end of the year, with potential additional increases if oil prices reach $100 per barrel. “If prices were to reach $100pb and stay there, that could add another 0.5-0.8%-pts onto inflation at end-2024,” said Peach.

Conversely, Russia appears poised to benefit from the current oil price dynamics. Oil products refining has been reduced by an estimated 16% since the fighting moved into the new drone war phase, with Ukraine targeting Russia’s oil refining capacity, but that fall has been more than offset by the increase in oil prices.

“While recent Ukrainian strikes on Russia’s oil infrastructure may cause some short-term disruption to oil refining and exports, the latest oil price rally will probably have an overall positive impact in Russia. Urals crude is currently at $83pb, near its highest since mid-2022 and up from $60pb at the start of this year. In ruble-denominated terms, which is what matters for the government’s budget revenues, oil prices are 35% higher than they have been on average since the war started,” says Peach.

This increase in oil prices has bolstered Russia's macroeconomic stability, enabling the government to enhance its war efforts without negatively impacting its budget or current account. One year on from the disastrous budget results at the start of 2023, Russia’s budget receipts have recovered and the Ministry of Finance (MinFin) has put though a 20% year-on-year increase in federal spending for the first quarter, offset by a substantial rise in oil and gas tax revenues and non-energy revenues. As a result, Russia's budget deficit has narrowed from RUB1.5 trillion in February – about 96% of the full year estimate – to RUB600bn ($6.4bn) in March. The current account has soared from $5.2bn in February to $13.4bn in March, a substantial surplus.

Looking ahead, if oil prices maintain their current levels, Russia could see further improvements in its fiscal and external positions. Although there is an expectation that Urals crude prices might decrease to below $70 per barrel by year-end, energy tax revenues are anticipated to remain high, potentially allowing for increased military spending. However, such fiscal expansion could limit economic spare capacity and add to inflationary pressures.

Russia’s budget oil and gas revenues and forecast