‘We are definitely in better shape than we were in 2016’
Experts consider Russia to be well prepared to an oil price fall
Although oil-producing nations all over the world are worried about the ongoing oil market collapse, Russian producers are now more protected compared to 2016. The current weaker ruble is positive for both oil exporters and the state budget, industry analysts say.
Russian oil companies and the state budget are now more resilient to oil price volatility than they were in 2016 when OPEC and its allies first agreed on coordinated crude production cuts, says S&P Global Platts citing Russian oil analysts. While experts consider that Moscow is likely to agree to some extension of the OPEC+ agreement this week due to the severity of the coronavirus situation, they also see Russia’s increased resilience to price fluctuations as here to stay.
The fiscal rule introduced by the Russian government in 2017 reduces revenue volatility and softens the impact of oil price fluctuations. According to head of the Paris branch of Aperio Intelligence consultancy George Voloshin, the channelling of excess revenue due to higher oil prices into the National Wealth Fund (NWF) protects the ruble from surging against the dollar/euro and helps to meet the inflation target. “On the downside, if the price of oil falls below $40 per barrel, the government will use the NWF for stabilisation purposes by selling US dollars for rubles and thus preventing the ruble from weakening,” he said.
The greater predictability of ruble exchange rate volatility and oil-linked inflation is a good thing for exporters with significant international operations such as energy exporters, Voloshin considers. “Ruble strengthening amid rallies in oil prices is not happening, the ruble has decoupled from the oil price. So the ruble is kept permanently weak, which is good for exporters like oil companies,” agrees one Moscow-based analyst. “We are definitely in better shape than we were in 2016, there’s no question about it.” He assumes that Russia could probably survive oil prices at $30 per barrel for a couple of years, although this would mean no increase in GDP, social spending or real incomes.
The fiscal rule is a positive not only for oil exporters but also for the broader Russian economy, as it remains structurally dependent on oil. Thus, it is likely to become a permanent fixture, although there may be some amendments such as increasing the threshold above $40 per barrel. At the same time, concerns over the impact of the coronavirus on oil prices and demand may determine Russian oil production policy in the short-term. On Sunday, President Putin called for continued cooperation with OPEC and ordered ministers and oil companies to prepare for various scenarios resulting from the coronavirus outbreak.