MOSCOW: For all the sanctions Western leaders can throw at Russia, the biggest threat to President Vladimir Putin’s ability to back separatists in east Ukraine is something beyond his or their control: the price of oil. With Russia’s $2 trillion economy heavily dependent on crude exports, oil prices are always closely monitored by the Kremlin, but the government is particularly wary now as tensions with the West mount and sanctions ratchet up.
Such conflicts often push up crude prices, but as long as oil, which accounts for 40 percent of state revenues, remains above the average $104 per barrel written into the 2014 budget, Moscow has little immediate need to worry.
The alarm bells will start ringing if it falls significantly below $100, forcing the government to pay more attention to propping up an economy already close to recession. The International Monetary Fund warned in May that Moscow had no contingency plan for such a scenario, so a sustained tumble in the price of crude could even undermine Putin’s grip on power. “If the oil price goes down to $75 and stays there for a few years, Russia will have regime change,” said a prominent Russian economist who asked not to be named. “Two years ago I would have said $60, but now, given the lack of growth, the increase in corruption and sanctions, $75 would be enough.”
Such a scenario is not merely idle speculation; most analysts expect oil prices to fall in the coming years as new production, including from unconventional sources in North America, applies downward pressure to markets, with some forecasts going as low as $70 per barrel for Brent crude oil in 2020, down from over $105 currently.
A long-term decline in prices may be unlikely given the unrest in Iraq and the limited scope for Iran to increase output due to sanctions, but any substantial fall could derail the Russian economy.
Sergei Aleksashenko, a former deputy central bank governor and now a scholar at the Higher School of Economics in Moscow, said a $10 drop in oil prices would strip 700bn roubles ($20bn), or 5 percent, from Russian budget revenues a year.
That translates to about 1 percent of GDP. Local economists estimate that a $10 price drop could rob Russia of 3 to 4 percent in GDP growth. “The most evident outcomes of any decline in oil price are destabilising of the balance of payments, devaluation of the rouble, rise in inflation and decline in budget revenues, decelerating of the growth,” Aleksashenko said. “It is evident that the longer the period of reduced oil prices, the more significant the impact on the Russian economy.”
A drop to $38 per barrel in the aftermath of the 2008 financial crisis sent Russian GDP falling 7.8 percent, and it shed $200bn of reserves within a few short months trying to defend the rouble, which still lost a third of its value. Its reserves, though still the world’s fifth largest at nearly half a trillion dollars, are more than $130bn below their level at the beginning of the 2008 crisis.
The crisis passed when prices promptly climbed, but if Moscow learned any lessons, it is not clear in its economic pronouncements.
“The government only publishes a basic level of macroeconomic risk analysis to support fiscal policymaking,” the IMF said in its May report. “There is no analysis of the implications of (changes, such as in oil) for the government finances.”
The Finance Ministry manages two oil windfall revenue funds. One, the $87bn Reserve Fund, has a clear goal to patch budget holes if the need arises.
Former finance minister Alexei Kudrin said in a recent interview with ITAR-TASS news agency that if oil were to fall to $80 per barrel, the fund could last for two years. “That (reserve) is rather small,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington.
If oil hits $75-80, Aslund said “Russia would have to cut its imports, which would hit the standard of living, investment and economic growth. A decline in GDP and standard of living would be inevitable.”