RS Market breakdown Russia is still banking on oil

Russia is still banking on oil

March 2013

High prices on hydrocarbon raw materials will allow the Russian economy to stay afloat in 2013
 

Despite the fact that forecasts have appeared in the past few months predicting the price of oil to stop growing, Russian analysts and industry experts are not expecting any serious changes on the market. Prices will remain quite favorable for Russia and money from the oil and gas sectors will keep forming the foundation for Russia’s budget.

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According to the Director of the Investment Analysis Department at the investment company ‘Univer’, Dmitry Aleksandrov, budget income in 2013 will amount to 12.8 trillion rubles, while expenses will total 13.3 trillion rubles (a deficit amounting to 0.8% of GDP or 521.4 billion rubles given the price of oil is at 91 dollars per barrel).

‘However, now expenses are calculated irrespective of forecasted oil prices, but rather they are based on the average price over the course of 5 years. In turn, given a forecasted price on oil of 97 dollars per barrel, real expenses are calculated at 91 dollars per barrel. All additional income from the oil and gas sector go towards the Reserve Fund’ – he noted.

According to him, the current situation allows one to accumulate additional state profit given a price of 20 dollars per barrel. The government directly and indirectly receives around 70% of this amount (roughly 1.55 trillion rubles). Analysts, when making their calculations, assume a real forecast of 109 dollars per barrel, consequently, the situation with meeting the budget will be favorable and allow the state to make additional reserves.

At the same time the leading analyst at the Alpari Analytic Department, Leonid Matveev, suggests that 2013 does not bode to be successful for the Russian economy.

‘In the first half of the year it is more than likely that oil will continue to get stronger. However, by the middle of the year grow on Brent oil quotes will hit a ceiling of 130 dollars per barrel, while WTI will reach 104 dollars. Joint actions by OPEC countries regarding the amount of oil to be extracted (which has recently dropped) will dictate the high prices. Aggravation of the Iran situation may lead to growth’.

For Russia the main threats boil down not only to the price on oil, but to the amounts to be exported to its European partners. Due to the debt crisis in the Eurozone supply may decrease which, naturally, will reflect upon Russia’s ability to meet its budget, points out the analyst.

‘If things shape up this way (with the world economy putting on the brakes) Russia will develop at a growth rate of 3-4% per year. However, it is worth noting that resource nationalism policies are being accompanied by reforms geared towards development diversification. Russia’s dependency on the price of oil is still significant, but it is gradually dropping. Also, one can call 2 factors keys to success: first of all, the ‘security blanket’ from higher profit oil sales and secondly, one of the lowest foreign debt to GDP ratios’.

Russia’s dependency on the price of oil is still significant, but it is gradually dropping

In his turn, an analyst from the financial company AForex, Narek Avakyan, is more than confident that the price of oil will continue to hover above 100 dollars a barrel. ‘In actuality, this is the benchmark which balances the Russian budget and allows the country to ensure 100% macroeconomic stability. One should expect to see an overall revitalization of the Russian economy as a whole and strangely enough very little will depend on the price of oil’.

Completely different factors will come into play.

Firstly, gradual improvement of the situation in the European economy which was one of the locomotives for development of the Russian economy before the crisis. Secondly, expanded cooperation with Asian countries in energy and industrial product supply (mostly in the military and industry sectors) which may become a strong foundation for ensuring the stability of the Russian macro economy and its exports. Finally, thirdly, development of Russia’s own processing industry which will gradually push out import and will try to emerge onto export markets.

© RIA Novosti, Aleksey Fillipov
Dmitry Medvedev at the World economic Forum
“Hypercube” building in the innovation center “Skolkovo”, Moscow region

‘The main reasons for such factors are the following: firstly, Russia’s accession to the WTO is having an impact – Russian producers are practically competing on even footing with foreign companies; consequently they are forced to improve the quality of their products and improve production efficiency as a whole’, - on expert goes on. - ‘Secondly, improvement of the European situation will significantly alleviate banking funding (the European financial market accounted for more than 50% of Russia’s banking liquidity before the crisis) which gradually will allow for a decrease in interest rates on loans and make them easier to acquire which will lead to a growth in demand for banking services (first and foremost, for loans) from individuals and organizations. This will jump start consumer demand (mostly for durable products) and finally, this will boost business activity in the economy, which will consequently lead to growth. Finally, thirdly, large-scale state events (preparations for the 2014 Olympics in Sochi, the Football World Championship in 2018, the University Games in Kazan in 2013, the creation of scientific communities like Skolkovo, etc.) will ensure a stable portfolio of orders for many Russian companies which will make the economy stable over the next few years and this will allow for additionally business activity’.

One can state that the modernization and economic diversification declared by the government seems to finally be picking up speed

Additionally, according to him, another important factor for such optimism is the domestic IT sector which is continuing to show double-digit growth rates: the Russian IT industry is already exceeding 25 billion dollars and has the potential for at least 3-fold growth in the upcoming 5 years. Finally, one can state that the modernization and economic diversification declared by the government seems to finally be picking up speed. This cannot be called excessive optimism for all one has to do is simply look at employees need for IT specialists and engineers and compare their salaries to the average level in Russia.

Sergey Slavin,
Economic observer
еxclusivelyfor Russian Survey RS