Russia Finds Echoes of 1980s Oil Collapse as Slump Persists

  • Russia reacting to oil collapse by redeeming external debt
  • Drop in budget revenue forcing fiscal adjustments for 2016

Russia is facing an “unprecedented” squeeze from a selloff in oil, which is similar to the 1980s collapse in world crude prices that undermined the Soviet Union, according to Deputy Finance Minister Maxim Oreshkin.

“The shock on commodity markets is now compounded by the factor of sanctions,” Oreshkin said Thursday at a Moscow conference organized by Fitch Ratings. While the Soviet Union used large-scale foreign borrowing to cover its needs, Russia “is redeeming external debt rapidly starting in the second half of last year.”

The economy of the world’s biggest energy exporter is struggling to shake off its first recession in six years after a renewed slide in oil prices that’s pushed crude down more than 20 percent from this year’s closing peak in June. With some of the country’s largest companies isolated from foreign capital markets by sanctions over Ukraine, Russia’s external debt shrank more than 23 percent since the start of last year to $556 billion on July 1, central bank data show. The total load, which includes sovereign and corporate liabilities, will be at $500 billion on Oct. 1, according to Oreshkin.

Fiscal Adjustments

As slumping oil prices crimp budget revenue, the government is on course for the widest fiscal deficit in five years. That’s forced it to overhaul its approach to crafting the budget by shortening its fiscal planning horizon to one year, from three, for 2016 and suspending a rule that capped public spending based on average long-term oil prices.

The fiscal deficit, which reached 2.1 percent of economic output in the first eight months, is projected at “a little less” than 3 percent this year, according to Finance Minister Anton Siluanov.

“Russia is in a pretty bad recession,” Charles Seville, a senior director at Fitch, said in an interview in Moscow on Thursday. The economy is set to contract about 4 percent this year before returning to “very low growth” of 0.5 percent in 2016, assuming oil at $60 a barrel, he said.

Gross domestic product fell 4.6 percent in the second quarter from a year earlier after a 2.2 percent drop in the first three months. The central bank forecasts an economic decline of 3.9 percent to 4.4 percent in 2015.

The ruble traded 0.7 percent weaker at 65.7550 versus the dollar as of 5:11 p.m. in Moscow. It’s the world’s worst performer in the past 12 months with a 42 percent drop. Brent crude, used to price Russia’s main export blend Urals, was 78 cents lower at $48.97 a barrel on the London-based ICE Futures Europe exchange.

$50 Oil

Russia is basing next year’s budget on an average oil price of $50 a barrel. The Finance Ministry sees crude near that level in 2017-2018, Oreshkin said. With oil at $50 and the ruble slightly weaker than 60 versus the dollar, the deficit won’t exceed 3 percent of economic output in 2016, he said.

Russia won’t see positive economic growth on a quarterly basis until the first three months of 2016, according to Oreshkin. Even so, the economy has by now succeeded in adjusting to shocks and is better shielded from risks of a slowdown in China and a possible rate increase by the U.S. Federal Reserve, according to Oreshkin.

‘Smaller’ Impact

“It’s good that Russia, which has already gone through a period of harsh adaptation in the past year, will experience problems to a much smaller degree” than other countries, he said.

The Finance Ministry plans to end the year by selling more debt than it redeems and wants to issue “several hundred billion” rubles of securities in net borrowing in 2016, according to Oreshkin. By 2018, it plans to fund the deficit strictly by borrowing on the market, he said.

While acknowledging the need for a shorter fiscal horizon, central bank Governor Elvira Nabiullina said on Thursday that Russia should return to three-year budget plans as soon as possible. Speaking in Kazan, Russia, she also took issue with the prospect of higher government borrowing.

“We don’t consider it necessary to increase state debt to finance the large deficits,” she said. “Deficit should be under control.”

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