Article / 01 December 2014 at 13:33 GMT

If oil doesn't bounce back, what then for Russia?

Russia oil and gas expert
United Kingdom
  • Russian reaction to Opec-sanctioned oil glut muted
  • Budget requires average Urals oil price of $100/b
  • Plunging ruble likely to come under yet more pressure

By Nadia Kazakova

It seems that the response of Russian officials to the do-nothing policy unveiled by Opec last week is to sit and wait in the apparent belief that the price of oil must bounce back. This may well be a comfortable approach, but it also a dangerous idea.

If low oil prices continue, Russia will not only fall short in terms of its budget, but it will also see its share of the world oil market shrink.

The correct response would have been to start structural reforms in the energy sector, including fierce cost-cutting, allowing fresh private capital into the oil and gas industry and launching a wholesale revision of investment projects (many of which are nothing more than white elephants). At the moment, however, the Russian response seems overly complacent.  

Bear

Plunging oil prices have not provoked the Russian bear into action. Photo: iStock

Moscow's official line seems to be that oil prices will be under pressure over the next three to six months, but will then climb back to the $90/barrel range. This is where the price of oil needs to be in order to balance the Russian budget. At the moment, the country's budget law assumes both an average Urals oil price of $100/b for 2015 and USDRUB at 37.7.  

It is not surprising, then, that Russian president Vladimir Putin deemed the Opec decision to be "overall acceptable for Russia". He observed that winter is coming and said he believed that the oil market would stabilise in the first quarter or the first half of 2015. Putin did not mention the level at which oil prices might stabilise, nor why this would happen over the next six months.

Rosneft CEO Igor Sechin was a bit more specific. Sechin's view is that oil prices might go as low as $60/b or lower, but only during the first six months of next year. He believes that this will lead to a redistribution in the oil market, as some companies will not survive the lower oil prices.

Russian economic development minister Alexei Ulyukaev believes that global oil supply and demand should balance closer to $80/b. He also said that his ministry would be looking at adjusting its oil price forecasts (which are used for the Russian budget). 

At the moment, the market is doing its own adjustment: As stated, Russia's 2015 budget balances at $100/b for oil and USDRUB at 37.7, which requires a Urals oil price of 3,770 rubles/barrel. If the price of oil drops to $70/b, then USDRUB must drop to around 54 (or: 3,770 divided by 70).

Kremlin

Moscow requires a sharp jump in oil prices if it plans to balance its 2015 budget. Photo: iStock

Kseniya Yudaeva, the deputy governor of the Russian central bank, is less upbeat. According to Vedomosti, the central bank sees an extended period of lower oil prices as being highly likely.

This is a notable deviation from the official line. 

The central bank might be positioning itself in such a way as to resist simple and temporary solutions to the oil problem. Examples of such solutions might be: more liquidity/cheap loans to the banking system, struggling companies and/or failing industries. Such calls are likely to come from both creative Duma deputies and the heavily-lobbied executive branch. 

The bank might also have to make a difficult decision on its key rate (currently at 9.5%) as inflation is expected to climb over 9% by the end of 2014 and over 10% in the first quarter of 2015. Further devaluation of the ruble, which is inevitable if oil prices remain weak, would put more upward pressure on the inflation rate. According to Yudaeva, a 10% devaluation in the ruble devaluation adds 1% to Russia's rate of inflation. 

Russian oil professionals have started to talk about a decline in the country's oil production. Initially, the official line (as expressed by energy minister Alexei Novak) was that Russia is unaffected by both the Opec decision and falling oil prices, and that the country will continue to produce 525-526 million tonnes of oil (10.6 million b/d) in 2015. 

This optimistic view was slightly adjusted by deputy energy minister Kirill Molodtsov, who admitted that Russia could see its oil output reduced by 200,000-300,000 b/d if “the oil price situation does not improve”.

Lukoil vice-president Leonid Fedun went even further, saying that he believes that Russia's oil production might decline by about 170,000 barrels at current exploratory drilling levels. It could also, he said, fall even further over the next four to five years, with Fedun estimating a shortfall of around 35 million tonnes a year (700,000 b/d).

Lukoil

Russia's second-largest oil company, Lukoil, is concerned 
about a decline in production: Photo: iStock

Lower oil output could mean lower oil exports and revenues, which would put further pressure on the Russian currency.

The "sit and wait" approach might not be the appropriate one if Russia plans on weathering this particular oil crisis. Granted, the Russian oil industry did manage to get through the 2009-10 dip in oil prices without a major production loss, but the situation is quite different now. 

Sanctions have cut off easy access to both technology and capital. And the official reluctance to see the oil price decline as a long-term structural problem might make the situation even worse. 

All in all, this does not bode well for the already battered ruble. For those keeping an eye on the beleaguered currency, USDRUB hit a high of 53.9074 today.

-- Edited by Michael McKenna

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector. Read more of her views on social trading leader Saxo Bank's content platform, TradingFloor.com.
5y
Mickette Mickette
Nadia, don´t worry for Mr. Putin & Friends. Oil will bounce back.
5y
LeTaulier_Lmi LeTaulier_Lmi
Rise up Mickette! We all know than even an oil price of $100/b, "Mr. Putin & Friends" will always have Champagne and caviare at the table. We are speaking about a country of 140 millions inhabitants, member of the UN's security council and a nuclear power.
5y
Anar Babayev Anar Babayev
))))))Mickette,she*s all the time worry ))) only about that and writes))) again mine to the comment will remove ((((
5y
jmmn jmmn
My friends, up to where can the eurrub go?
5y
Anar Babayev Anar Babayev
67.483 critical max, on bottoms 60.76
5y
DP DP
So.... Should I get the hell outta Moscow first thing in a morning?
5y
Anar Babayev Anar Babayev
лучше на русском писать)))
5y
RomanSK RomanSK
This is an economic war. USA and EU will not use military power against Russia, they rather use this intelligent way to defeat Putin. US friend, Saudi Arabia didn't cut oil production because low oil price is the best way to hurt Russian economy together with sanctions. Russian military power is useless. Economic and cyber wars is the reality we live. Welcome in 21st century.

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