RS Main Price of a Barrel to Hit the Economy

Price of a Barrel to Hit the Economy

June 2013

Russian Budget may have to pay dearly for the choice to stake on oil

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That said, the authorities do not seem to be particularly concerned over this so far. According to the Russian Minister of Economic Development, Andrei Belousov’s statement made on April 24, for the time being oil prices are expected to stay at $95–100/barrel. Answering questions from media representatives, he noted that significant drops in oil prices might occur in the foreseeable future, yet for the immediate future this seems to be highly unlikely. “We are now observing fluctuations… I think that this (decline in oil prices) is not our prospect for the near future, the prices will be fluctuating within a range of $95–100/barrel”, such is the minister’s forecast. As we have reported earlier, that in early April the Ministry of Economic Development and Trade raised its average oil price forecast for 2013 from $97 to $105/barrel.

In the meantime, on April 17 the price of Russian Urals oil dropped to $96.6 for a barrel – the absolute minimum since July last year. This is a red flag, in fact: the unsteady growth of the global economy and the resulting low demand for oil in the global markets may result in a sharp drop in the cost of exported Russian oil as early as in the third quarter of the current year.

Experts believe that the current decline in oil prices had begun back in February, when the prices had dropped by 6% in the course of one month, reaching a 10% decline for the month of April. As a result, the prices have all in all dropped by 18% compared to the annual maximum. “Of course, it is not comparable with the last year’s decline of 30% over the period from February till June, let alone the 70% decline that took place between July and December 2008, the rates of oil prices decline are nevertheless getting very close to that, - says Sergey Pukhov, Senior Researcher with the Development Center of the Higher School of Economics. – This, naturally, brings us face to face with a question whether the Russian economy has every reason to fear a repeat of the situation we witnessed in 2012? We believe that the events of 2008 are unlikely to happen again this time: from the angle of the demand, Saudi Arabia is not going to let the prices decline, for this country’s budget is balanced at $94/barrel, on the other hand, the demand will be boosted by the American economy which is growing, as well as by the Chinese economy whose growth rates remain above the 7% threshold set by its leadership in respect of the coming five-year period”.

The Development Centre analysts believe that the chances that the Eurozone will be immersed into a major prolonged recession are extremely low. “In other words, if the current decline in oil prices continues, there is a great probability for it to be over by the middle of the year and even then it will never hit below $80/barrel (last year’s minimum was $90/barrel), said Mr. Pukhov. – After that two scenarios are possible: the prices will either be maintained at this level should the situation in the Eurozone deteriorate, or they will rise back to $100/barrel, that is provided the external market environment is conducive”.

For his part, analyst with AForex Narek Avakyan feels certain that oil prices will continue to stay above the $100/barrel over this year. “This is in fact precisely the level which guarantees a deficit-free budget and will help to ensure a 100% macroeconomic stability, he believes. - All in all, Russian economy is expected to show a slight improvement in the coming year”.

Experts do not forecast the decline in Russian oil prices to last long

Co-director of the analysis department at Investcafe Grigory Birg claims the decline in oil prices is not going to last long. ”They will be somewhere in the vicinity of $100/barrel. And, that said, considering that the state budget for the current year was drawn up based on an average price of oil of $97 for a barrel, unpleasant surprises resulting from the brief decline in oil prices down to $100 or even slightly less are not expected, he says. What’s more, in the first quarter of 2013 the average price of a barrel of oil exceeded $110. Nevertheless, the budget gap continues to be a topical problem the offered solution for which – increase of taxation- remains unchanged. For example, the revenue from the excise fuel taxes growth may help replenish the road fund“. Head of the Investment Analysis Department at the Univer investment company, Dmitry Alexandrov, believes that the budget revenue in 2013 will reach 12.8 trillion rubles, the expenditures – 13.3 trillion rubles. With a deficit at 0.8% GDP, or 521.4 billion rubles, provided the oil price stays at $91/barrel.

“Now, however, the calculation of expenditures is not pegged to forecast oil prices, but based on a moving mean for 5 years. All in all, with the oil prices forecast at $97/barrel, the real expenditures will be from $91/barrel, - he says. – All resulting extra revenue from the oil and gas sector will serve to replenish the Reserve Fund”.

According to Mr. Alexandrov, the current situation allows accumulating additional revenue for the state based on the prices of approximately $20/barrel. 70% of this amount goes directly to the state budget, and that amounts to some 1.55 trillion rubles. We proceed from the feasibility of the $109/barrel forecast. The situation with the budget replenishment will, therefore, turn towards favourable, allowing the formation of additional reserves.

Sergey Kulikov, Economic Commentator for Nezavisimaya Gazeta
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