The oil shock is approaching Russia

oil pumpThe events predicted by economists in early 2015 have already arrived in Russia, where the second wave of the oil crisis is imminent. Further drops in oil market prices may result in reviewing the country’s budget and paralyse its oil and gas sector.

 

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“The new reality” forced Moscow to make difficult decisions about government spending, announced Anton Siluanov, minister of finance on January 13th, as quoted by Reuters.

 

The minister admitted that the 2016 budget will balance out only when the oil price increases to 82 US dollars per barrel, which is a lot higher than the $50 assumed in the calculations for 2016, not to mention the current price, which is approaching $30 per barrel.

 

According to Siluanov, the price may increase in the second half of 2016. Nevertheless, during the Gaidar Forum in Moscow, he admitted that the 2016 budget needed to be revised and the average price reduced from 50 to $40.

 

Prime Minister Dmitry Medvedev, who was also present at the conference, announced that the country must brace itself for “hard times”, adding that Russians “must prepare for the worst case scenario”. The Russian Central Bank predicts the price will stay lower than $35 per barrel. It was assumed that the 2016 deficit would be at 3 per cent of the GDP, provided that the average price per barrel would be $50.

 

According to Siluanov, the first step to fix the situation would be to cut spending by 10 per cent in "non-protected" areas, which excludes the state sector and pensions.

 

Alexei Kudrin, former government member and chairman of the Commission for Civic Initiatives, confirmed that budget cuts were inevitable because of the oil price slump, and a 10 per cent cutting rate was an "optimistic assumption".

 

"Due to decreasing oil prices, reducing the budget is inevitable. The prices will most probably stay low, perhaps at $35 or maybe $30. It's hard to predict. Nevertheless, this is a significant drop even in comparison to the previous year. 10 per cent cuts are an optimistic assumption", explained Kudrin to RIA Novosti news agency. He also added that the deficit might reach 1 trillion rubles.

 

Cheap oil made companies that export oil from Russia decrease their 2016 export forecasts by 6 per cent in comparison to last year.

 

The companies asked Transneft for access to its pipelines for 215.8 million tons, which is 6.4 per cent less than in 2015. The applications to the entire pipeline system totaled at 476.7million tons of oil, which is 1 per cent less than last year. A year ago, oil export increased by 7 per cent in comparison to 2014.

 

The Vedomosti daily argues it is hard to explain why companies like Gazprom Neft, Bashneft and Lukoil decreased their oil exports. The companies refused to comment on that. However, one could guess this means there are plans to decrease oil production in 2016. Because of the dropping oil prices as well as EU and US sanctions, new production projects are being cancelled or frozen. Extraction in Western Siberia is decreasing. Rosneft lowered production by 3.3 per cent to 62.4 million tons in its main project managed by its daughter company Jugansknieftiegaz, Lukoil-East Siberia extracted 41 million tones, which is a drop by 6.1 per cent.

 

Low-priced oil, whose rate in case of the Russian Urals export oil mixture is already below $30 a barrel, is also impacting the decreasing margins of exporters. Yet, the government decided not to lower the oil export tariffs in 2016. Dropping exports and production threaten to undermine the Russian government's plan to keep fighting for oil markets against the biggest players, including Saudi Arabia.

 

The newspaper also reminded about the deliveries of Saudi oil to Poland’s PKN Orlen, calling this transaction an example of how the market is changing unfavorably to Russia. "Rosneft will be flexible and will fight to keep its shares on its traditional markets", declared Igor Sechin, the company's CEO.

 

That will not be easy. Reuters predicts that in 2016, oil companies will need to decrease their spending by 20 per cent. The negative trend is visible on the stock exchange, and the Standard & Poor's 500 Index Forecast says that oil companies will record a 5.9 per cent loss in stocks profit in the last 3 months of 2015, year to year. International corporations want to curb their exploration and extraction budgets by 15 per cent when the price is 45-$50 per barrel, or by 20 per cent if it is $40. Last year these expenses were decreased by 23 per cent. Therefore, investments at 673m$ in 2014 will slump to $520 million in 2015 and $444 million in 2016, as explained in a survey prepared by Reuters.

 

However, the agency's insiders claim that Middle Eastern countries and Russia might be an exception. Moscow is to increase its expenses by 3.6 per cent and the Middle East by 6 per cent. This is driven by their fight for the market. At the same time, the sanctions against Iran have been lifted, which means the country, which owned one-fifth of the European market before the embargo, is back in the game.

 

Despite that, Russians are not backing out. On the one hand, Rossiyskaya Gazeta daily found a positive side to the fact the Russian economy is now the fifth last in a ranking prepared by Bloomberg. The daily notes that Greece, Brazil, Venezuela and Ecuador are behind Moscow, so their situation is even worse. According to Russian experts quoted by the newspaper, low gas and ruble prices are a chance to develop exports. On the other hand, the increasing prices of foreign currencies should encourage Russians to turn to national producers and suppliers that offer cheaper services. Additionally, the possible privatisation of national companies, which might be necessary due to the budget crisis, may increase their productivity.

 

"The Russian daily also stressed that Moscow actually did better in the ranking than last year when it was fourth last", ironically commented the Meduza portal.

 

Wojciech Jakóbik is an energy analyst at Jagiellonian Institute and editor-in-chief of economic portal biznesalert.pl.

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