Article / 14 January 2016 at 10:00 GMT

Oil glut threatening to sink Russian budget

Russia oil and gas expert
United Kingdom
  • Moscow considering budget cuts as oil prices collapses
  • Prolonged dip below $30/barrel barely tenable for Russia
  • Tax subisides boosting oil producers at current levels
 
Russia
Russia's oil producers are still pumping away, but a further decline in the price 
of crude would likely prove disastrous for Moscow. Photo: iStock 

By Nadia Kazakova

The Russian government appears to have a bee in its collective bonnet concerning the official projections for 2016. The ink has not yet dried on the 2016 budget law released in mid-December before Moscow started looking at possible budget cuts if the Urals oil price averages $40 rather than $50/barrel. 

Ultimately, however, it seems that the government was just going through the motions, not quite convinced that the oil price will remain below $40/b and real cuts would have to be made. As the Urals oil price dipped below $30/b, the plan of action is apparently to compile more macroeconomic scenarios and give the ministries until early April to prepare its amendments to the existing budget. 

The economic ministry dusted off its macro forecast for the conservative oil price scenario and found that a $10 drop in the oil price means a budget shortfall of RUB 1.6 trillion or $22 billion (at the official USDRUB rate of 72.6 for 2016). Most of said shortfall comes down to declining oil and gas taxes (RUB 1 trillion) plus a drop in non-oil revenues as the economy shrinks by almost 2% on a $10/b drop in the price of oil. 

There are some reserves in the budget, but they look woefully inadequate if the Urals oil price averages $30/b or less in 2016. 

Russia's key macro economic assumptions at various oil prices:
x
Source: www.economy.gov.ru, www.kommersant.ru, author's estimates

For each $10 drop in the oil price, the Russian budget looses RUB 1 trillion in revenues and the economy shrinks by 2-3%. The budget deficit, in fact, would balloon to over 7% of nominal GDP if the Urals oil price stays at $30/b throughout 2016. 

Even with the savings and cuts, the country's Reserve Fund would run out by the end of the year. The rouble (at its current levels, at least) would also appear overvalued under such a scenario.

Despite sharply lower price, Russia continues to pump oil as if there was no tomorrow. The oil and gas condensate output was running at 1.483 million tonnes (10.87 million barrels/day) as of January 12 according to the official stats. The average daily output at the end of December 2015 was around 10.82m b/d. 

As far as the oil companies are concerned, their net revenues (after paying production taxes and export duties) have been less affected by the drop in the oil prices. Their absolute and relative tax burdens have lightened significantly as well due to the progressive tax scale and zero taxation on the first $15/b of the oil price.

Russian oil sector taxation at various oil price scenarios, USD/b and billion RUB:
Source: author's estimates

At least in the short run (and given the tax windfall), the oil companies are in good shape to continue pumping at current levels. There will be a breaking point when the Urals oil price reaches $15-$20/b and the government will be left with very little in terms of options – at this point it might shake the Russian oil industry for extra tax. This might then eventually (with some time lag) affect production, but probably not enough to make or break the global oil market.

The question now is whether the Russian government has the luxury to wait and see or whether it should be already reaching for the alarm button. So far, Moscow does not seem sufficiently worried. 

Moscow sunset




















if oil prices drop much further the Russian state will need 
to make some very difficult decisions. Photo: iStock

— Edited by Michael McKenna

Nadia Kazakova is a Russian oil and gas specialist
4y
fxtime fxtime
A sort of ''Prisoners Dilemma'' scenario...if they stop pumping or even reduce pumping of oil they lose revenue as other nations will keep their outputs constant and gain any extra market share if Russia slows output and staying at current output levels earns nothing but a depletion of reserves. I wonder if Russia will try the QE route and print more roubles. It will devalue further their own currency but keeps the state departments running for a little while longer.
4y
Nadia Kazakova Nadia Kazakova
There are quite a few proponents of a Russian style QE, including an advisor to President Putin. The current central bank is strongly against and I suspect that the start of any QE in Russia would mean changes at the top of both the central bank and the government.
4y
ozy ozy
Nadia, do you think there is a dirty game on Russia about oil? I mean, opec&us playing for cheap oil to make in trouble russia.. weaker russia mean less powerful in the middleast where they try to share the cake. if there is this dirty game it's unlimited for oil bottom, 20's or even 10's.....
4y
fxtime fxtime
@Ozy you could argue that Iran reckons there is a war against its oil by the USA and Saudi....or Sauds reckon the USA and Russia are swamping their markets. You can skew your suggestion to a host of countries not just Russia....so no I personally don't think this is one mammoth manipulated game against Russia. All of the oil players are being hurt.
4y
ozy ozy
so, why they (opec) don't try to support oil prices. if we believe their plan to keep market share they need more supply, but already it's to clear it doesn't work. and they also was that very openly, and still they don't plan any emergency meeting to discuss aout supply level. while oil prices slip down they regret a meeting before june, 2 or 3 days ago, very sure and clear.. it shows they don't care so much about this price level and even worse.. may be they will be happy if russia loose to be powerfull in mideast... of course with out any evidence we can not sure, but all these scares me about oil price.
4y
fxtime fxtime
OPEC isn't as tightly controlled anymore there are factions who will pump out oil at any price to keep cash flow positive. This isn't an OPEC against Russia or anyone else for that matter it is about cashflows. They may have negative outcomes for the host country but at the moment they need the fundsflow to remain positive. Supply and demand economics have a huge bearing on price as you correctly say but as Nadia shows in her excellent article it is also about funds management and trying to slow down the reserve fund usage.
4y
ozy ozy
of course any of oil producer country could be happy from current low oil prices, for their budget balance. so, they have to move to do something to rise oil price, but they don't do. my question is, why they don't move while they understood their plan to continue supplying for keeping their market share doesn't work, and they don't give up from this plan, not yet and not any sign of they move.. there has to be a logical answer to get out of thinking that dirty game on russia from opec&us. you don't do war always with guns, there are much better ways to kill countries economies.
4y
fxtime fxtime
I disagree with your constant argument that we are witnessing some battle with Russia via oil. Accounting principles of source & flow and application of funds along with elasticity economics and general supply/demand economics are what we are witnessing. I suspect we need simply to agree to disagree here.
4y
Nadia Kazakova Nadia Kazakova
It would be actually good news for Russia if the oil market was manipulated. It would mean that the current oil prices are artificially low and must go back up. If the market forces are at play, the low oil prices might have to remain low until demand/supply balance is restored. While this balance is restored, the oil price, theoretically, can go down even to single digits.
As to the question why OPEC is not cutting output, the conspiracy theory I prefer is that Saudi Arabia is not too keen on Iran suddenly getting a windfall from its oil exports.
4y
fxtime fxtime
Yeah I can agree with the Saudi/Iran issue. Cutting output would be the sensible thing to do afterall restricting supply raises the price if demand remains constant but there are too many oil exporting economies who want to be as competitive as possible to ensure sales and cash flow. Possibly we are witnessing the oil industryand exporters finally becoming a true market for efficient pricing !
4y
Warren Buffet007 Warren Buffet007
Ms. Kazakova, maybe you observed that not only Russian sucks with the actual Oil price,all the Oil producer Countries are in the same situation,but relax at this moment are a little war between Arabia and US due the Fracking activities, but actually more than the half of this companies are bankrupt!. Also fill up your cars with cheap gasoline until is finish!.
4y
ozy ozy
Nadia, I didn't mean a dirty game could be by manipulation. I'm saying exactly what you wrote, demand/supply.. more suppyl and send price down. as all we think, saudi keep supply level because they don't want to loose their market share, and what i'm saying is they saw and understood this didn't work as they think. and I don't think so they're so stupid, if they don't have any other plan supported by us... lets think why they answered so quick and so sure for calling an emergency meeting from nigerian member. I hope I'm wrong. jst to try to find an answer logical that why saudis don't try to cut at least a bit production from opec, or at least why they are so closed and regret to discuss it while china weakness and global demand worries talking in those days??

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Tradingfloor.com permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Tradingfloor.com and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Tradingfloor.com is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Tradingfloor.com or as a result of the use of the Tradingfloor.com. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through Tradingfloor.com your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. Tradingfloor.com does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of ourtrading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws. Please read our disclaimers:
- Notification on Non-Independent Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail