No OPEC Euphoria for Russia as Trumponomics Adds to Volatile Mix

Updated on
  • OPEC-driven rally shows no ‘structural’ change, Siluanov says
  • Higher oil prices whetting appetite for Russian spending boost

After finding little cheer in OPEC’s agreement to cut production, Russia is bracing for what the age of Trump means for oil.

Already facing down calls to “divide up the additional resources,” Finance Minister Anton Siluanov said on Wednesday that he’s urging the government to protect its dwindling wealth funds, given the issue of compliance with the OPEC deal and a possible resurgence of shale oil production. Days earlier, Bank of Russia Governor Elvira Nabiullina called for a “healthy conservatism” in forecasts and warned the outlook for crude prices still represents a “serious risk” for the economy.

The outlook for oil remains in question because a number of issues are still without “valid answers,” including shale output, according to Siluanov. U.S. producers stand to gain from the deal as higher prices encourage renewed drilling in shale regions, with President-elect Donald Trump promising to unleash domestic oil, gas and coal output, largely by rescinding “job-killing” rules and environmental regulations.

“The government and the Finance Ministry have the right conservative approach,” said Ekaterina Vlasova, a former Russian central bank official who’s now an economist in Moscow at Citigroup Inc. “It shows the same budget discipline that helped survive 2014-2015 better than other oil countries and will allow to adapt better to the world of Trumponomics.”

Left at the mercy of the oil market for two years after the worst oil downturn in a generation, the economy of the world’s biggest energy exporter is now at risk of stagnation. Already running the widest budget deficit in half a decade, the Finance Ministry needs to police spending and cool appetite for handouts before presidential elections in 2018. 

Balancing Books

While financial strains are easing, the ministry still wants to reduce the budget shortfall by one percentage point each year to balance the books by 2020. Russia stands to earn about 1 trillion rubles ($16.2 billion) more than planned next year if crude averages $10 higher than the $40 oil price used to calculate the budget for the next three years, according to Siluanov.

Oil prices have climbed about 17 percent since the Organization of Petroleum Exporting Countries announced its first production cuts in eight years late last month as it seeks to end a three-year glut that the group admits lasted longer than it expected. The accord was widened on Dec. 10 when 11 non-members signed up as well.

Russia’s Urals export blend usually trades at a discount to Brent, which was near $54 in London on Thursday.

“Improvements in oil prices, in our view, aren’t structural in character,” Siluanov told reporters in Moscow on Wednesday. “Rather, it’s a reaction to the limits on oil output adopted by OPEC countries for half a year.”

Shale Rebound?

With nations including Russia joining OPEC’s pledge to reduce output, and Saudi Arabia surprising the market by saying it will cut more than previously agreed, analysts say oil may climb to $60 a barrel for the first time in almost a year and a half. But the planned reductions exclude producers such as the U.S. and Canada, which have benefited from a shale boom. The number of active rigs drilling for crude in America has already climbed to the highest since January.

While crude may rise to over $60 a barrel if OPEC members and other nations cut production as promised, a rebound in U.S. shale output would bring prices back to $55, according to Goldman Sachs Group Inc. Saudi Energy Minister Khalid al-Falih has said that he didn’t expect a big supply response from American shale producers in 2017. Crude output at major U.S. shale plays is already poised to climb for the first time in six months.

Little Impact

Some Russian officials are more sanguine.

“There’s no need to fear that shale oil will be a source of competition,” Energy Minister Alexander Novak told reporters in Tokyo Thursday. Current prices aren’t enough to stimulate shale-oil output in volumes that would have an “extraordinary” impact on the market, he said.

Russia’s 2017-2019 draft budget that won approval from lawmakers now awaits President Vladimir Putin’s signature. Under its terms, the government will cap nominal spending near this year’s level and plans no major stimulus to support domestic demand.

The challenge of fiscal consolidation is among the risks for the central bank as it tries to reach its 4 percent inflation target by the end of next year.

“The slightest improvement in the environment brings back calls to increase spending,” said Evgeny Koshelev, an analyst at Societe Generale SA’s Rosbank PJSC unit in Moscow. “That undermines the quality of budget planning and is rather bad for inflation.”

— With assistance by Ilya Arkhipov

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