Tuesday, 19 Jun 2012
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Russia: Oil and the Wider Economy – June 2012
British Embassy Moscow
Falling oil prices have driven down the rouble to a three year low and the Russian markets have had their worst month since 2008. If oil prices continue to fall the impact on the Russian economy could be serious. S&P say $80 oil would be enough to push Russia into a mild recession, although the government disagrees.
The 2008 financial crisis caused Russia’s economy to contract by 8%, the largest fall of any G20 country, but since then high oil prices have meant that Russia has been relatively unaffected by the ongoing crises in the Eurozone and elsewhere. But the continuing fall in oil prices means this may no longer continue to hold true.
Recently the price of Urals Crude followed Brent below $100 a barrel, and as a result the rouble fell to a 3 year low against the dollar and euro. Russian stocks also recorded their 3rd worst month since records began in 2000. The rouble has since recovered some of its losses following significant Central Bank interventions, but the dramatic fall highlights just how linked the Russian economy is to the oil price.
Nothing has fundamentally changed in the Russian economy, and these negative trends are caused almost exclusively by the fall in global energy prices. The rouble has always been driven by changes in the oil price and the symbolic drop below $100 a barrel has hit the currency hard. Two thirds of the Russian stock market is linked to oil and gas, so again falling energy prices have a strong impact on the market here. The latest Eurozone news has also driven a flight to safety across global markets, further depressing Russian stocks.
The fall in the rouble has attracted the attention of both consumers and the government. A number of Russian mass market tabloids have been running stories discussing the weakening rouble. Prime Minister Medvedev has chaired a meeting on financial market stability and key economic figures - including the Finance Minister and Central Bank Chairman - have taken to the airwaves to try and increase consumer confidence, the latter announcing to a press conference that all his personal savings were in roubles.
Nonetheless, the Russian economy is in a good place in the short term. Russia is in a better place than it was in 2008, its banks are better capitalised, its markets are reasonably liquid, and – so far at least – the Central Bank is continuing to allow the rouble to float freely within an agreed band. Russia’s direct exposure to the Eurozone remains low and domestic consumer demand is strong with inflation and unemployment both at historic lows.
But a sustained fall in oil prices will only exacerbate the existing structural problems in the economy. The budget balances this year at $115, now well above the prevailing oil price, some analysts expect the break-even point to rise to $125 in the coming years. While high prices at the start of the year mean the year’s average oil price is still above $115, some commentators expect oil to finish the year between $90-$100 and others have a long term expectation of $80-$90 oil, and do not rule out oil as low as $50.
Capital outflows meanwhile have slowed but not turned around and could accelerate again if lower oil prices were to spook investors. And although the potential earnings are great the investment climate – while not directly oil linked – remains challenging.
While no one disagrees that a fall in oil prices is bad for the Russian economy, the Government are more bullish about prospects – the Ministry of Economic Development think $80 oil will knock GDP growth down to 2%, whereas Standard and Poors say $80 pushes Russia into a mild recession, with a further decrease to $60 shrinking the economy by 5% and creating a budget deficit of some 8% of GDP.
The Russian economy is, as ever, driven by the oil price. Rising oil prices deliver increasing returns to the Russian budget and encourage investors. Falling oil does the reverse, increasing the deficit, worrying consumers and deterring much needed investment - in the first five months of this year alone $46.5 billion left the country.
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