Oil drops below $80, implications for Russian budget

(Business New Europe – bne.eu – October 28, 2014) The price of a barrel of Texan light dropped lower than $80 for the first time in two years, but Russia’s economy minister has retained its forecast for the next three years of the oil price remaining within the corridor of $90-$110, according to Interfax. “It is not possible to say with certainty that we have entered a phase of low oil prices,” Russia’s deputy economy minister Aleksei Vedev said at a briefing on October 27 in Moscow, as quoted by business daily Vedomosti. “Both we and the energy ministry believe that the most likely price corridor for the coming three years will be between $90 and $110 per barrel,” he added.

Russia’s State Duma approved the three year budget plan for 2015-2017 at the first reading. The budget is based on an oil price forecast of $100, removal of sanctions against Russia in 2015, and subsequent quickening of growth. However, finance minister Anton Siluanov also stated at the parliamentary hearing that economic reality had changed and a reserve version of the budget was needed.

According to business daily Vedomosti, the reserve budget will cut expenditure by 10%, or RUB1.5 trillion. According to Moscow’s Higher School of Economy, if the price of oil drops to $85, the budget will lose RUB1.2 trillion, but this will be partly compensated by a weakening ruble – each ruble the dollar grows bring the Russian budget an extra RUB190-200bn.

Meanwhile, the ruble is indeed continuing to weaken against the dollar, after a short rally, reaching new historical lows of RUB42.295 to the dollar, and RUB53.681 to the euro, with the central banks spending $2.45bn to defend it.

Market participants now expect Russia to raise interest rates at the next meeting of the central bank council.