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Russia Expects Oil Price To Rise, But Not Enough To Balance Moscow’s Budget

Russia can’t live with oil prices below $79 per barrel, but Finance Minister Anton Siluanov says he doesn’t expect them to drop much lower, and they may even rise a bit in the medium and long term. Still, he says, that won’t be enough to stabilize Russia’s strained budget.

Two-thirds of Moscow’s annual budget comes from taxes on Russia’s oil and natural gas companies. The budget laid out for 2015 requires an oil price of $100 per barrel. Now Siluanov has come to agree with many energy analysts that that the price will remain around $80 for the foreseeable future.

“We are now in a new environment,” Siluanov told the Federation Council, the upper house of Russia’s parliament, on Nov. 26. “[S]o our budget, economic plans should be built assuming the new macro environment which, we think, will not change any time soon.”

Related: Veteran Oil Minister Says OPEC Alone Can’t Set Oil-Price Levels

How long will that be? “The new oil price of $80-90 per barrel is most likely to stay over the medium- or even longer-term,” Siluanov told the lawmakers.

That will leave Russia’s budget short of money – money that will be hard to get due to US and European sanctions imposed not only on Russia’s oil industry but also on its banking sector, leaving Moscow shut out of Western money markets.

As a result of the lower price of oil, the government of President Vladimir Putin will have to adjust spending during 2015 through 2017, Siluanov told the Federation Council. The minister has already warned Putin about the consequences of his plan to increase defense spending.

In fact, he told the legislators that Russia’s budget would lose huge amounts of revenue if oil prices don’t begin rising soon and the ruble remains weak. “The Russian budget may lose 500 billion rubles [nearly $10.7 billion],” he said.

And if the Russian economy continues with sluggish growth, Siluanov said, that shortfall could double to 1 trillion rubles, or nearly $10.7 billion.

Siluanov’s comments follow those by Alexei Ulyukayev, Russia’s minister of economic development. In an interview published Nov. 25 in the German newspaper Franfurter Allgemeine Zeitung, he said Russia’s economy is likely to grow by between 0.7 percent 0.8 percent by in 2014.

Related: Russia Might Be Forced To Cut Oil Production

The outlook for 2015 so far is 1.2 percent growth, Ulyukayev told the newspaper, but he added, “We possibly will have to correct our forecast.”

In the interview, Ulyukayev dismissed the idea that the 30 percent drop in the price of oil since June was somehow being engineered by some countries to hurt Russia and other oil producers. Instead he attributed the decline simply to shifts in supply and demand.

As a result, Ulyukayev agreed with Siluanov that oil prices soon will stabilize and perhaps even rise a bit. “Now the market is looking for a new equilibrium,” he said. “I think that in 12 months it will be found close to $90 per barrel.”

By Andy Tully of Oilprice.com

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