Russian officials already in the unenviable position of dealing with the impact of Western sanctions on their national economy as reflected in a tumbling ruble – in spite of continuous Central Bank interventions – and capital outflows, now face the possibility of a recession looming in 2015, according to recent World Bank projections.
Russia: Policy Uncertainty Clouds Medium-Term Economic Prospects
Source: World Bank
On top of that, steadily declining oil prices since June – with Brent crude last trading at around $78 a barrel ahead of Thursday’s crucial OPEC meeting in Vienna – certainly add to the headaches of Russian officials. Russian Finance Minister Anton Siluanov is cited as quantifying his country’s annual loss due to Western sanctions in the wake of the Ukraine crisis at around $40 billion. Additionally, he noted “that falling oil prices were the larger evil, with the damage amounting to up to $100 billion (…) per year.” Russia’s budget is extremely dependent on crude oil and natural gas export revenues. Breaking Energy pointed to this Achilles’ heel back in April 2014 (here).
Even though estimates vary, Russia is widely believed to need an average crude oil price of between $90 and $115 a barrel to balance its budget. Nevertheless, Russia still possesses sufficient foreign currency reserves to cover any budgetary shortfalls for the time being.
As the global oil market awaits how OPEC responds to the decline in crude prices – down about 30 per cent since June – analysts’ predictions are manifold – ranging from a “large production cut to revive prices, to a small reduction, or none at all”.
According to Reuters, Saudi Arabia – still the ‘primus inter pares’ among oil producing countries in spite of growing US shale oil supplies – seems to view the market as “oversupplied”. This, however, should not be misinterpreted as current market conditions being ‘dire enough’ for Saudi Arabia to aggressively act in concert with other OPEC members plus Russia to cut oil output. Thus, no surprise that pre-OPEC talks among Saudi Arabia, Russia, Mexico, and Venezuela yielded no agreement. OPEC’s leading producer, Saudi Arabia, is not going to flinch before delivering an impactful blow to both US shale oil producers and their fellow – even more price sensitive – Canadian oil sands producers. North America is the region where on a map an imaginary Saudi Arabian finger would point if asked who ‘involuntarily’ needed to cut oil output and, therefore, solve the world’s current oversupply – which would stabilize the price of crude oil. Consequently, the oil market with an expectation and/or hope for a substantial Saudi production cut may be in for a long wait. The current situation could be illustrated as follows:
Oil producing countries around the globe are riding a mountain stage at the Tour de France (cycling) and have together reached the foot of the last mountain of the day’s stage, which happens to be ‘Hors Catégorie’ (‘beyond categorisation’ and very steep) and thus extremely difficult to climb. The leader – in our case, Saudi Arabia – is climbing the mountain more or less comfortably with plenty of (energy) reserves left, looking back and controlling the peloton – this group of countries includes the US, Russia, and OPEC countries – while staying the course and increasing the speed (rhetoric) as soon as it gets steeper (oil price falls further and more countries feel the pinch). Here, the endgame is straightforward: before reaching the finish line (maintain market share) at the mountaintop the leader tries to shake off as many competitors as possible along the way.
In our “oil oversupply” case, countries that are very dependent on oil revenues for balancing their budgets are the first to fall behind. This definitely applies, for example, to Venezuela. Meanwhile, even though the price decline begins to impact both Russia and the US it still does not ‘hurt’ (oil price still above pain threshold) the countries enough. Russia, however, is in terms of oil price sensitivity in a much worse position than the US and is slowly falling off given the above-mentioned confluence of troubling domestic trends. In sum, this illustration would suggest that Saudi Arabia is still far from reaching its ultimate goal of taking North American supply offline. Note, given that countries calculate their budget needs based on a certain projected average crude oil price, Saudi Arabia will have to stay the course for at least the next six months to quiet everybody who sees Saudi Arabia’s clout over the global oil market diminishing.
Meanwhile, Russia’s biggest concern is a ‘low’ price of crude oil for the foreseeable future. This is why Russia may consider unilateral production cuts in 2015 in an attempt to boost oil prices but has only very limited flexibility to take oil production wells offline during the harsh Siberian winter. Deutsche Welle (DW) reports that Igor Sechin, CEO of Rosneft, said the company might “lower [Rosneft’s] daily oil production by 25,000 barrels [per day].” The following interactive graphic/timeline (click here) shows where the price of oil was over the past 35 years as major events unfolded in Russia. Note, that during the global financial crisis and Russia’s concomitant last recession (2008-2009) real prices for oil reached only $65.64 a barrel. A similar price level would spell significant trouble for Russia and may, for that matter, also slow at least future oil production growth in the US, thereby allowing Saudi Arabia to achieve its ultimate goal.
Russia And The Price Of Crude Oil
Source: RadioFreeEurope / Radio Liberty; US EIA data, pegged to US import price.
