Drop in Crude Oil Prices Could Pressure Russia’s Budget

The global economy seems set to pour some salt onto Russia’s Ukraine-related economic wounds.

The cost of Brent crude oil, the global benchmark, has fallen more than 13 percent since the start of July to trade near a two-year low at $97.25 a barrel on September 29. By comparison, Russia needed an average Brent price of about $117 to balance its budget last year. That break-even point has risen from about $50 in the mid-2000s as President Vladimir Putin’s government has hiked spending on social programs, the military and salaries for public sector workers.

Brent’s decline below the $100 level would appear to spell fiscal trouble for the Kremlin at a time when lenders are especially reluctant to finance Russian debt. The government canceled nine straight weekly domestic bond auctions following thedowning of Malaysia Airlines Flight MH17在乌克兰在7月中旬。但米oscow’s Ministry of Finance has been able to avoid a budgetary squeeze thanks to a secret weapon: the ruble.

Russia generates about half of state revenues from taxes on oil and gas sales, and crucially for the Treasury, those sales are priced in dollars. Every ruble increase in the exchange rate to the dollar boosts government revenues by about 1.4 percent, or R200 billion ($5.2 billion), according to the Finance Ministry. The ruble was trading at 39.44 to the dollar in late September, compared with 32.77 at the start of the year. That decline of more than 16 percent has produced a windfall of oil revenue and generated a budget surplus of about 2 percent of GDP in the first eight months of this year.

“今年的俄罗斯预算表现得很好，”伦敦皇家苏格兰皇家银行皇家银行的俄罗斯经济学家Tatiana Orlova说。“难以说出休息的油价现在归功于更灵活的外汇政策。”

A further 10 percent drop in Brent’s price, to about $90, might leave the Kremlin feeling less comfortable, says Yaroslav Lissovolik, chief economist for Deutsche Bank in Moscow. Russia has become more dependent on hydrocarbon revenue since the global financial crisis, with the government’s nonoil budget deficit swelling to some 10 percent of GDP currently from 4 percent in 2008, he estimates. That gap is bound to increase this year, as Russian corporate profits look set to fall by 30 to 40 percent from 2013, shriveling the Treasury’s tax take. Meanwhile, Putin is moderating but not eliminating increases in discretionary expenditure. State sector salaries will rise 2 to 3 percent in real terms this year and more than 10 percent in nominal ruble amounts, Lissovolik predicts.

The weaker ruble has its downside — notably, a rising inflation rate, which stood at 7.6 percent in August, above the central bank’s 5 percent target. “The fact that weaker dollar oil may translate to more rubles is an accounting windfall, not a paradigm for addressing Russia’s ills,” Lissovolik says.

One more medium-term threat to the Kremlin’s well-stocked coffers is banking sector weakness. The authorities spent R239 billion in August to bolster the capital of state-owned VTB Bank and state-owned agricultural lender Rosselkhozbank. That may not be the last banking injection, says Natalia Orlova, chief economist at Alfa-Bank in Moscow (no relation to RBS’s Orlova). “Slow GDP growth and rate hikes will increase the risks of nonperforming loans and later may force the cabinet to recapitalize state-owned banks,” Orlova says. “I think the risk of this scenario is material.”

财政部长安东斯·斯蒂蒙诺夫迄今为止，旨在根据前七年的平均石油价格基于“媒体，学术界”和媒体和工业界，“Lissovolik笔记。

俄罗斯通过丰富的积蓄进入乌克兰对抗，但如果普京不断切割较大的馅饼切片，这些舷墙不能永远持续。“内阁正试图以战术方式管理，”Alfa的奥尔瓦马说。“但没有策略来解决与高社会义务和适度收入增长有关的长期问题。”

See also “Putin Is on a Mission to Develop Ties With China.”