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Oil Crash Shrinks Russian GDP; Energy Minister Blames Saudis

Oil Crash Shrinks Russian GDP; Energy Minister Blames Saudis

Russia’s oil-dependent economy appears headed for a second year of recession, and Energy Minister Alexander Novak says the blame falls squarely on the Saudis.

The Russian gross domestic product fell by 4 percent in November from its level in the same month in 2014, and had shrunk 3.7 percent in October from its levels a year earlier, the Economy Ministry reported Monday.

The reason, to no one’s surprise, is the plunge in oil prices over the past 18 months. The global average value of a barrel of oil has crashed from over $110 per barrel in the summer of 2014 to just below $40 per barrel today.

Because Russia’s government relies on oil production for half its revenues, it’s preparing for a 3 percent deficit in the budget for the coming 2016 fiscal year. Making matters worse, profits in any industry related to oil are down so far that it appears its current recession may last as long as two years.

“The risk of a deeper decline has intensified,” Andrei Klepach, chief economist at Russian state development lender Vnesheconombank and a former deputy economy minister, wrote in a report. He added that both bad economic and political news for Russia will contribute to “a stable negative trend, forcing downgrades in forecasts for next year.” Related: Lifting The Oil Export Ban Could Be A Short-Sighted Action

The bad political news includes the Western sanctions imposed on Russia since 2014 because of Moscow’s involvement in the conflict in neighboring Ukraine. This also is bad economic news for Russia, but trumping that is weak price of oil, and Moscow blames that entirely on Saudi Arabia.

Oil prices began falling in June 2014 in large part because of increased production in North America and Russia, which created more supply than demand could consume. Yet five months into oil’s nosedive, at its ministerial meeting in Vienna, OPEC, led by Saudi Oil Minister Ali al-Naimi, decided not to cut production to shore up prices but to maintain its ceiling of 30 million barrels per day.

Al-Naimi said his aim was to keep prices low in a price war with drillers in the United States, who were relying on relatively expensive hydraulic fracturing to extract oil, and in Russia, who can’t help shore up the price of oil by limiting production because the climate in most of its oil country is so cold that stopping production at some wells would freeze them up.

At its latest meeting, on Dec. 4, OPEC effectively dispensed with its production ceiling altogether, putting more downward pressure on oil prices, and on Russia’s economy. And this has rankled Novak. Related: China's $1 Trillion Nuclear Plan

“This year Saudi Arabia has ramped up production by 1.5 million barrels per day, which in fact destabilized the situation on the market,” the energy minister said Monday in an interview with the state-owned broadcaster Rossiya 24.

Add to this, Novak said, is Iran’s return to the market, probably in early 2016, once the West lifts sanctions it imposed because of Tehran’s nuclear program. Throughout much of 2015 Iran has been urging OPEC, without success, to make room for its return to the market.

Still, there is some hope that oil prices will stabilize sometime in 2016. In its annual World Oil Outlook, issued Dec. 23, OPEC said it expected “a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market.” Related: OPEC: $95 Oil, But Not Until 2040

Novak, possibly referring to the OPEC forecast, also expressed optimism, saying, “According to experts’ estimates, demand-and-supply curves may coincide in the second half of 2016, which will balance the market.”

Arkady Dvorkovich, Russia’s deputy prime minister, agreed, saying low prices eventually could become the agent of their stabilization. “For some time, any company, any producing country is able to sustain such low prices,” he told Rossiya 24. “But then investment will inevitably go down, which means that production will fall and prices will rise.”

By Andy Tully of Oilprice.com

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Leave a comment
  • Lee James on December 30 2015 said:
    Russia receives about half of its tax revenue from domestic oil production. What export and foreign aid item will be most affected by a shortfall in oil sales? Military weapons. I hear Russia makes cars and refrigerators. I've never seen one, unlike Russian weapons.

    Somehow I'm not too sympathetic if Russia runs up against declining oil sales.

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