Fall of Brent Crude Oil Price to $33 Per Barrel Causes Havoc for Russian Budget

The fall of the price of Brent crude to $33 per barrel has prompted concern about the impact on the 2016 Russian state budget, which was calculated with an estimate of oil at $50 per barrel, Gazeta.ru reports.

Currently Brent is at $33.62 and the value of the ruble has fallen to 74.60 to the dollar and 81.12 to the euro.

Translation by The Interpreter:

The Chinese stock market crash, the weakening of the yuan, the increase of US oil reserves and the end of the US oil export ban have contributed to the fall in oil prices.

According to Gazeta.ru, Russia’s Ministry of Economic Development calculated the current budget with the figure of $50 per barrel per year, with a growth in the GDP by 0.7%. A conservative estimate was calculated with oil at $40 and 1% fall in GDP. The Central Bank anticipated continuation of the recession at 0.5-1% growth with $50/barrel, and calculated $35 a barrel would increase the fall of the GDP to 2-3%.

Now, with Brent trading at $36-38 in recent weeks, $20 might be the new marker. Some pessimists such as Royal Bank of Scotland economic Andrew Roberts is certain oil could go as low as $15 a barrel; Bloomberg reported that investors are buying put options at as low as $15.

Aleksei Antonov, an analyst for Alor Broker, said that the Chinese crisis, new oil volumes on the market, the spread of electric cars and alternative energy sources will exert a downward pressure on oil prices. Russia will face a recession whether oil is at $25 or $15 per barrel and can expect a cascade of negative effects; Antonov said that if oil does get to $25/barrel, the ruble is likely to go as low as 100 rubles per dollar. There will be further reductions of imports, rising inflation and the necessity of the Central Bank to raise the key rate again. 

Vladimir Nazarov, director of the Scientific Research Finance Institute of the Ministry of Finance said that the GDP would go down about another 4% if oil goes below $30.

Finance Minister Anton Siluanov said Russia is moving to “plan B,” telling Rossiya 24 that “we essentially must be ready for any development of the situation around the price of oil.”

Government planners have dropped $50 a barrel from consideration and now are using $40 for next year’s budget — still a far cry from today’s trading price at $33.

What Russia needs, say economists, isn’t so much higher prices as more stable prices. The Russian economy can absorb fluctuations even of 25-30%; in 2015, prices ranged from $36 to $69 per barrel.

As Siluanov said in an interview for Rossiya 24:

Currently it’s at 74.

Siluanov acknowledged that there could be a “pause” in investment with these figures.

— Catherine A. Fitzpatrick