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Russia May Be Forced Into Production Cuts Says Deputy PM

The 7-month-old plunge in oil prices will force Moscow to cut its budget for 2015 by 10 percent, perhaps even 15 percent, a senior Russian government official told a panel discussion at the World Economic Forum in Davos Switzerland.

Russia, the world’s largest producer of crude, traditionally has relied heavily on oil revenues to run its government, but Deputy Prime Minister Arkady Dvorkovich said Jan. 21 that it is easing that reliance by tapping its currency reserves to make up for some of the revenue shortage.

“A few years ago we decided to establish a macro framework [of financial reserves] where dependence on oil price is lower than before,” Dvorkovich said. In 2015, though, Moscow decided that the reserves also should be used to shore up the stability of Russia’s banks because “no one expected prices to go down so sharply,” he said.

Related: Expanding Russia Issues Europe An Ultimatum

To keep from spending more money than it has, Russia plans to “reduce the budget by maybe 10 to 15 percent,” Dvorkovich said. His words elaborated on those of Russian Finance Minister Anton Siluanov, who said a week earlier that Moscow was prepared to “make decisions on optimizing expenditures.”

Oil now costs around $50 per barrel. Moscow’s preliminary budget for 2015 had been predicated on revenues from oil at $100 per barrel.

Russia also faces unexpected inflation. Deputy Economic Development Minister Alexei Vedev said Jan. 14 that inflation for the current year would reach its peak of between 15 percent and 17 percent in March or April. That’s as many as seven percentage points higher than the Russian Central Bank had forecast as recently as December 2014.

Part of that problem is the erosion in the value of Russia’s currency, the ruble. It was down 41 percent against the US dollar during 2014 as a result of the plunge in oil prices, the flight of capital from Russia and economic sanctions imposed by the European Union and the United States over Russia’s treatment of neighboring Ukraine.

In Davos, Dvorkovich said a return to stable oil prices would help restore the ruble to a more realistic value.

In fact, Dvorkovich said, Russia may find itself reducing oil production by as much as 1 million barrels per day, but he stressed that such a cut would not be made in coordination with OPEC. Instead, he said, low prices may simply make some Russian oil projects temporarily unprofitable.

Related: Russia Abandons PetroDollar By Opening Reserve Fund

Oil output in Russia averaged 10.6 million barrels per day in 2014 – a post-Soviet high – but the drop in prices and the Western sanctions have threatened this important source of government income.

“If the oil [price] stays at $50 for a long time, of course some projects will become less attractive and a small output decline may start. But we will not cut production on purpose,” Dvorkovich told Reuters on the sidelines of the forum. “We could lose at maximum a 10th of output but more likely 300,000 to 400,000 [barrels per day]. There are no grounds for a bigger decline.”

In fact, Dvorkovich confidently told Reuters that Russia could balance its budget regardless of the price of oil, which he said will probably remain low for a long time.

By Andy Tully of Oilprice.com

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  • Eddie on January 26 2015 said:
    totally agree with capitalist...

    Why Russians never learn lessons and still build the economy on commodities. They don't need to look back at 80's in the 20th century to find out how Soviet collapsed along with low oil price. They just need to look at the 1998-1999 Russian Crisis or the recent 2008-2009 oil crash.

    The head of the regime, Putin has personally experienced twice of such crash and still has not learned a lesson from it? I don't see why Russians still see him as a 'hero' . To me, all economic boom during Putin's first two terms are coincidence of oil boom cycle. And now, the Russian's GDP per capita just rolled back to the same level a decade ago which tells me that Putin's policy has done nothing to the Russia economy...
  • Bob on January 25 2015 said:
    Russia has been exporting energy for some 40 years. Also, Putin, beside being a lawyer, earned a PH.D. in economics from the University of St. Petersburg, where his published thesis was on managing state owned natural resources.

    Beyond that, every oil producer in the world is hurting badly, a good example is Canada, where the currency is crashing, now at below $.80 to the dollar. Australia is feeling the same effect, Mexico even worse, and Venezuela turning into a failed state. The effects are also spreading through the U.S. frackers, where major cutbacks in drilling is occurring. Continental Oil, the major pioneer in the North Dakota Bakken, is now down some 60%.

    The truth is that hardly anyone in the oil industry expect the sudden collapse of oil prices.
  • capitalist on January 23 2015 said:
    “no one expected prices to go down so sharply,” he said.
    This only shows who is so called supporting cast to Putin.
    People without any knowledge of market rules, without knowledge of history, and the worst of all ignorant people which do not study how the oil and resources economy change.
    When CCCP did collapsed we had exactly same situation, oil prices did fall down and Soviet Union did fall apart.
    I am amused how stupid are the ministers in Russia .
    Putin is not so smart as well by choosing low quality advisers instead of world class managers.
    Another socialistic experiment fell apart

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