17 January 2023

Falling oil prices threaten to blow a $15bln hole in Russia’s finances

  • The average price for Urals crude was $50.5 per barrel in December — down 24% month-on-month. The traditional discount for Russian oil, compared with Brent crude, was usually about $3, but by the end of last year it had reached $30 per barrel. This discount is a direct result of Russian oil producers having to switch to the Asian market and slash prices due to the risk of sanctions — as well as the price cap.
  • And low prices will likely remain. A new embargo on supplying Russian oil products to Europe takes force on Feb. 5, obliging Russian exporters to seek alternative markets for another 1.5 million barrels of crude oil each day (Asian countries only buy Russian crude to process in their own refineries).
  • These lower oil prices have led to catastrophic fall in Russia’s oil and gas revenues. On paper, they were up 6% in December compared with the same month last year and totalled $14 billion. However, $6.2 billion of this comes from a one-off mineral extraction tax payment paid by state-owned gas giant Gazprom. Without that payment, oil and gas revenues were down 41.2% year-on-year.
  • The current budget plans for 2023 are based on an average price of $70.2 for a barrel of Urals crude (even at that price, the authorities anticipate a budget deficit of $45 billion, or 2% of GDP). But if the average price of Urals turns out, instead, to be $60 per barrel (a figure that forms the basis of calculations by, for example, Alexander Isakov, Bloomberg Economics’ chief Russia economist) and Russia produces 10 million barrels a day, the government will be $15 billion short.
  • Officials are, apparently, not unduly worried at the moment. One federal official reminded The Bell that, in 2016, the average price for a barrel of Urals crude was less than $40 (the actual figure was $41.9 — The Bell) — and there were no serious consequences. “We can balance the budget even at $50,” he said. Another official told The Bell that there isn’t yet enough information to start panicking.
  • Isakov from Bloomberg Economics did not share their optimism. For one, in 2016, it was easier to reduce spending. Pensions and welfare payments were not index-linked and there was a public sector pay freeze. Second, back then, the authorities made up the shortfall in oil and gas revenues by taking on debt. That is also happening now. However, in 2016, 60% of new debt was financed by non-resident investors who brought with them foreign currency — which partly compensated for low energy prices. It may now be possible to slow capital outflows by raising interest rates, but this will not have such a big effect.

Why the world should care

Despite low oil prices, Russia won’t face a financial catastrophe in 2023 (the money stashed away in Russia’s sovereign wealth fund alone could cover the country’s costs for at least a year). But, as Russia approaches the second year of its war in Ukraine, the economy faces a deadly combination of reduced revenues and an increased budget deficit at a time when the commodities market is poor and reducing military and social expenditure is impossible. If this continues, the authorities will have to either cut spending, expropriate more funds from business (or the population), or resort to printing money.

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