MOSCOW - Falling oil prices could trigger a prolonged slump in Russia that would lay bare the growing fiscal risks, threatening President Vladimir Putin's election promise to increase wages and fanning public discontent.
The world’s largest oil producer is well-placed in the short
run to withstand sliding prices, thanks to sizeable cash
reserves and a flexible rouble. And Putin, who returned to the
Kremlin after March’s election, is still widely popular.
But the oil price has fallen by over $30 dollars in the last
three months, to close to $90 per barrel, and may fall further,
narrowing his room for budgetary manoeuvre just as mass protests
have underscored dissatisfaction with the government.
“This is not the best start for the new government,” said
Peter Westin, chief strategist Aton brokerage in Moscow.
“If the oil price is temporarily at these levels, or even
lower, it’s not a huge problem. The issue is whether it stays
there.”
Oil and gas taxes account for around half of revenues raised
by the federal budget, which Putin, as prime minister, used to
boost public sector pay and pensions as a way of overcoming the
2009 economic slump.
Putin, who has taken a more populist approach to dealing
with his declining popularity, promised even more public sector
pay rises as part of his election campaign.
While that would cushion the immediate blow of any slowdown,
running down the fiscal reserves to maintain high social
spending would only increase Russia’s long-term vulnerability to
yet another oil price shock.
“In the short term they can sustain a very low oil price,
but they need to address the structural problems in health,
education and pensions,” said Ivan Tchakarov, chief Russia
economist at Renaissance Capital.
“This is not a sustainable fiscal policy, there’s no
question about it.”
DEPENDENCY
The last time oil prices fell so precipitously, in 2009,
Russia’s economy slumped by a dramatic 8 percent. Collapsing oil
was also a catalyst for Russia’s 1998 economic crisis that ended
in devaluation and default.
Putin, in his annual statement on the budget on Thursday,
acknowledged that Russia’s reliance on energy prices was one of
its biggest policy headaches.
“The Russian budgetary system is highly dependent on the
situation on world commodity markets,” he said. “This limits the
opportunities for budget manoeuvre.”
For now, Finance Minister Anton Siluanov has earmarked $6
billion that could be spent in 2012 f rom a budget rainy-day fund
should a deteriorating global economy drag on growth in Russia.
“We hope we don’t have to make use of these measures,
because the steps being taken by the government and central bank
are sufficient,” Siluanov said.
He trimmed his 2013 budget deficit forecast to 1.5 percent
of gross domestic product, assuming an average oil price of $97
per barrel. The fiscal plan will help keep the national debt,
now around 10 percent of GDP, manageably low.
BUFFER
Analysts say the impact on Russia of lower oil prices may be
milder than during previous falls.
“In the short term, in the next one to three years, we are
fine,” said Tchakarov.
He noted that according to Finance Ministry calculations,
every one dollar fall in the oil price means that the government
loses around 55 billion roubles ($1.7 billion) in oil-related
taxes over the course of a year.
With the budget presently balancing at around $115 per
barrel, an oil price of $90 per barrel, if sustained over a full
year, would leave the government short to the tune of around $40
billion a year.
But that is still just a fraction of the $185 billion that
Russia has stashed away in two fiscal reserve funds, designed to
stabilise the budget in just such an emergency.
Even at $60 per barrel – the average oil price during the
crisis year of 2009 – the reserve funds could cover the
shortfall for about two years.
“I find this worrying about the budget at this moment a
little beside the point,” said Clemens Grafe, chief Russia
economist at Goldman Sachs.
“The fiscal buffers they have to absorb this are going to be
sufficient without cutting expenditure.”
Analysts also point out that since the previous financial
crisis in 2008-2009, the central bank has radically changed the
exchange rate regime, allowing the rouble to fall in line with
the cheaper oil price.
Since oil began its latest slide in mid-March, the rouble
has lost around 15 percent of its value against the dollar.
“The rouble weakened exactly in line with the oil price. And
a weaker rouble is very good because it will secure the rouble
equivalent of oil taxes for the budget,” said Evgeny
Gavrilenkov, chief economist at Troika Dialog.
SIGNIFICANT SLOWDOWN
Despite these buffers, most economists expect that a
sustained fall in the oil price would cause a significant
slowdown in Russia’s economic growth – still a surprisingly
resilient 4.2 percent in May.
“Between $70 and $80 per barrel you will have a recession,”
said Westin from Aton.
Russia’s ability to maintain government spending is limited
by the so called non-oil deficit – a measure of the underlying
state of the budget once oil taxes are removed – that has
ballooned from 5 percent of gross domestic product in 2008 to
over 10 percent this year.
Even before the latest decline in the oil price, the
International Monetary Fund and World Bank were urging Russia to
scale back this underlying deficit by cutting down on bloated
government spending.
In a recent interview with Reuters, Russia’s deputy prime
minister Igor Shuvalov vowed that while the government intended
to use its reserves to maintain expenditures this year, next
year’s budget would be “very frugal, tight and responsible”.
That implies that sooner or later, falling oil prices will
force cutbacks that will hit the pockets of ordinary Russians.
“The silver lining of a failing oil price is that it does
increase the urgency of social reform and budget cuts,” says
Kingsmill Bond, chief Russia strategist at Citigroup.
