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Irina Slav

Irina Slav

Irina is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing on the oil and gas industry.

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Why Russia Expects $40 Oil This Year

Budget deficit is a fascinating thing. It can turn around economies if it’s large enough or it can highlight their resilience, if it turns out to be not as large as expected. The thing is, no government can be 100 percent certain in advance what budget deficit it will have to contend with in any future fiscal year.

Russia is a case in point as it recently approved its 2017 budget, which envisages a deficit of 3.2 percent of GDP – a figure comparable to the United States’ 2.6 percent estimated for 2017. According to some analysts, however, such as Mauldin Economics’ Jacob Shapiro, this 3.2 percent is enough to make life difficult for Moscow over the next 12 months, which is why the Kremlin should hope for higher oil prices.

In fact, Shapiro says Russia needs oil prices to be 30 percent higher just to break even.

But Moscow is in no rush, and indeed appears unfazed. Finance Minister Anton Siluanov said at the end of last year that under the three-year budget plan approved by the Duma and the President, Russia should break even in 2019, as long as oil prices remain at between $40 and $45. The 2017 budget even stipulated an oil price of $40 a barrel, with $45 per barrel earmarked for 2019. Related: The Companies That Lead The Recovery In The U.S. Oil Patch

Of course, it’s generally unwise to take government officials’ words at face value, but given that Russia survived 2016 with a deficit of 3.7 percent and that non-oil exports apparently compensated for much of the lower oil revenues, chances are it will also survive 2017 without emptying its reserve fund.

In fact, this is what seems to be the consensus of 47 analysts polled by Bloomberg, as cited by TASS. The consensus stance is that inflation in Russia will fall to 5.1 percent from 2016’s 5-6 percent, and the budget deficit will fall to 3 percent. The analysts also believe GDP growth will be 1.1 percent this year, up from a contraction of 0.5 percent, according to data from the Economic Development Ministry.

Crude oil production in Russia increased by 2.5 percent last year, reaching a post-Soviet record in the last quarter. Yet now, it will have to cut, as it agreed to support OPEC’s efforts to restore the market balance in crude oil. The undertaking is for 300,000 bpd, to be eliminated gradually.

According to Shapiro, this automatically means 300,000 bpd will be taken out of exports. These numbers, however, can be easily manipulated, particularly considering Russia’s plans to actually increase exports from 2016’s 253.5 million tons, although just slightly. What’s more, this 300,000 bpd cut, as it became clear late last year thanks to remarks from Lukoil’s Vice-President, will actually not hurt average production – it will most likely be taken out as part of a seasonal reduction in overall output that takes place in the spring.

Related: The End Of The Rally? Oil Reverses, Natural Gas Trounced

One further consideration to make is the fact the country’s total output reached a new post-Soviet record of over 11.2 million barrels per day in November. The precise figure, according to Deputy Energy Minister Kirill Molodtsov, was 11.231 million barrels. And it is from this production level that Russia will take off the 300,000 bpd it agreed to cut to help OPEC in its market rebalancing efforts. A record-high figure that it’s not obliged – and is probably unable at the moment – to maintain.

In other words, making calculations based on assumptions in this case might make for sensational headlines, but the reality is probably quite different. Aside from the discrepancies between these assumptions and government data, there are also other external factors to consider.

Perhaps the more important question to ask is not when Russia will break even but rather why is it only stipulating an average oil price of US$40 in its 2017. It’s already factored in a gloomy oil price scenario, and it’s already budgeted for OPEC output cut cheating in 2017.

If the West is waiting for oil prices to crush Russia this year, it is likely waiting in vain. Russia will be just fine.

By Irina Slav for Oilprice.com

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  • Kr55 on January 04 2017 said:
    Expect the worst and hope for the best.
  • Ronald C Wagner on January 05 2017 said:
    Russia will survive but is a paper tiger aside from its nuclear weapons. Of course, it must be dealt with firmly. We should seek to bring it into the western alliance. Its only real threat is China.
  • jack ma on January 06 2017 said:
    Russia is using a good old KGB fear tactic of reverse phycology to mess with the Saudi brains. 40 oil means Saudi is bankrupt in a year or less. Great Russian ploy and as they say, the mind is a place of it's own where heaven can become hell or hell can become heaven. If Saudi believes that Russia believes oil will be at 40, then fear as a weapon will take it's toll. Putin is a master. IMHO
  • BS Buster on January 10 2017 said:
    As with anything coming out of Russia, actions speaks louder than words. Putin had no choice but to hack the US elections to influence the electorate to elect Russia friendly Trump and meddle in Syria to showcase his military weapons capabilities. Under normal circumstances, Russia would not take these risky steps unless he was really running out of money due to low oil prices and the sanctions. So, if oil prices stay low, he's as good as gone and Russia may face bankruptcy later this year.

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