Russian corporate profits soar thanks to high oil prices

Russian corporate profits soar thanks to high oil prices
Russian corporate profits in July are double their level a year earlier
By Ben Aris in Berlin October 23, 2018

The net profit of Russian non-financial corporations is up by half in the first half of this year thanks to higher than expected oil prices, according to new report by HSE’s Center for Development.

The report found that in January-July of 2018 higher oil prices made Russia's oil and gas firms more competitive and more profitable, pushing up demand for relevant products and services, BMB reports. However, other sectors lag behind considerably, particularly exporting industries that are unable to take advantage of a weaker ruble because of tariff barriers.

Banks are making more thanks to rising debt levels among Russians amid weak domestic demand conditions. The bank sector has already earned over RUB1 trillion ($15.3bn) in total over the first nine months of this year and RUB200bn in September alone, according to the Central Bank of Russia (CBR), which is well ahead of previous years, and a reversal in the crash in earnings in September 2017 when a mini-bank crisis hit as the so-called Garden Ring banks started to go bust.

Oil prices over the first quarter of this year averaged about $65 rising to $75 in the second quarter. Brent futures were trading at $79 at the time of writing in mid-October and have averaged $75 so far this month, but the price of a barrel has traded over $80 on occasion during the month. Based on the rule of thumb that the RTS stock market index is simply x20 the price of oil, the Russian stock market benchmark is currently 400 points undervalued, its deepest discount in years. 

According to Rosstat, cumulative corporate profit this year has reached RUB7.6 trillion, which is well ahead of the RUB5.6 trillion for the same month a year earlier. On a month-on-month basis profits in July were up to RUB1.2 trillion in July, which is also twice as much as in the same month a year earlier but less than the peak RUB1.4 trillion Russian firms earned in June this year.

However, high oil prices aren't enough to drive economic growth, which remains lacklustre, as the petro-fuelled growth model was already exhausted in 2013. Russia’s medium term economic outlook has growth stuck at 2% at best if no structural reforms are made. The government is trying to boost growth and Russian President Vladimir Putin has demanded higher growth rates than the global average during his last term in office that runs to 2024.

Drilling into the details, net profits of Russian non-financial companies grew RUB2 trillion from January to July, RUB1 trillion of which analysts attribute to higher oil prices, according to the HSE Center for Development report.

The profits of extractive enterprises increased 66.4% in annual terms. Oil-producers saw profits rise 2.2 times, BMB reports. In addition to rising sales profits, fuel exporters received RUB190bn in non-operating income, in part from exchange rate differences due to the ruble’s devaluation. Overall, however, the economy lost from devaluation: companies received approximately RUB888bn less before tax.