Will Cheap Oil Choke the Russian Economy?

Among the many threats facing Russia’s economy, cheap oil could be the biggest of all. Crude prices have fallen more than 23 percent since June, depressing the ruble and knocking a potentially gaping hole in the national budget, which draws 45 percent of revenues from oil taxes.

The Kremlin warned today that it will have to dig deeply into reserves if oil prices and the ruble exchange rate remain at current levels. Covering budget shortfalls over the next three years could deplete half of a $74 billion reserve fund the government created to guard against energy price fluctuations, First Deputy Finance Minister Tatyana Nesterenko told the RIA Novosti news agency. Russia’s draft budget for 2015 is based on $100-a-barrel oil, but crude is now trading at about $88, the lowest since December 2010.

“Lower oil prices completely overshadow the encouraging news from southeastern Ukraine,” where a fragile truce is holding as Russia begins pulling back troops from the border, chief Russia economist Dmitry Polevoy of ING Bank wrote in a note to clients today.

Oil prices, not Western sanctions, are what’s driving the currency’s sharp decline, analysts say. “The value of the ruble stayed relatively calm through the summer, even as sanctions were being ratcheted up,” Chris Weafer of Moscow consultancy Macro Advisory wrote in the Moscow Times. “Since early August, the ruble has fallen 9 percent against the dollar-euro basket, almost exactly mirroring the 8 percent decline in the price of crude oil over the same period.” The ruble, he said, “is behaving as a petro-currency.”

And it’s still falling: Despite $6 billion in interventions by the central bank over the past 10 days, the ruble declined again today, to 40.43 against the dollar.

Because of Russia’s outsize dependence on oil and gas, which account for more than two-thirds of its exports, lower energy prices can easily tip its $2 trillion economy into recession. “Growth is likely to remain positive only with oil prices above $92 to $93 a barrel,” says economist Charles Robertson of Renaissance Capital. At $90 a barrel, the economy would contract 0.4 percent next year, and at $80 a barrel it would shrink 1.7 percent, he predicts.

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