Russia Must Cut Break-Even Oil Price to $80, Citigroup Says
“It’s not impossible,” Kingsmill Bond, chief strategist at Citigroup Inc. in Moscow, said in an interview today. “It would massively reduce risks for Russia, and actually Russia will truly become one of the world’s most attractive markets.”
The government should cut spending to balance the budget at $80 a barrel compared with about $117 now, Bond said. Urals crude, Russia’s main export earner, is trading at an average of $113.76 a barrel this year. Citigroup lowered its 2012 estimate for the dollar-denominated RTS Index (RTSI$) by 20 percent to 1,600 after paring its 2013 Brent oil estimate to $99 from $120.
Russia’s central bank has urged the government to curb its oil dependence. The price the 2012 budget is based upon is “too high,” Alexey Ulyukayev, Bank Rossii’s first deputy chairman, said in an April 18 interview.
Russian equities trade at the cheapest valuations among 21 emerging markets tracked by Bloomberg, reflecting concern that the country is too reliant on oil. About 50 percent of government revenue comes from energy exports. The Micex Index was little changed at 1,346.04 by the close in Moscow.
“Until the oil price falls, the government is highly unlikely to do much to seek to restrain expenditure,” Bond said. Crude will drop to an average price of $80 a barrel over the next five years, he said.
Russia’s construction, real-estate, healthcare and banking stocks will gain from declining oil prices over the next decade as investors focus on companies that benefit from local growth rather than commodity prices, according to Bond.
The economy grew 4.8 percent in the first quarter, the fastest pace since the three months ended September 2011, the Federal Statistics Service in Moscow said in an e-mailed statement today.
Stock valuations will be boosted by wider foreign participation as the Micex-RTS Exchange debuts a central securities depositary in July, spurring liquidity by allowing investors such as U.S. pension and mutual funds to trade, Bond said.
Moscow’s Micex Index (INDEXCF) trades at 4.9 times estimated earnings, 50 percent less than the valuation for shares in the MSCI Emerging Markets Index, data compiled by Bloomberg show. That discount won’t narrow while Europe’s debt crisis drags on, Bond said.
“Russia is a very attractive story, but there’s still so much global uncertainty,” he said. “To overcome that, we need more than a quite-good reform story.”
Vladimir Putin returned to the Kremlin as president this year after four years as prime minister on promises of political reform, state asset sales and higher pensions and salaries. Privatizations have yet to begin, while police searched the homes of opposition leaders before a protest march on June 12.
Higher social outlays will bring a 4.8 trillion-ruble ($160 billion) jump in spending through 2018, according to Capital Economics Ltd.
“Very, very powerful, centrally directed” reforms are needed, Bond said. “Clearly we aren’t going to get that.”
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