The cheap oil in Russia’s economic car

In the light of an ongoing stand-off between Russia and the West, the dropping oil prices play out quite negatively for Russia's economy. 

Oil platform in Russia

The oil prices and Russia's Reserve Fund

The Russian government is still unwilling to admit the severe impact of low oil prices on economic prospects of the upcoming years. The oil price is low and likely to stay so and the state budget, the spending plans needs to accommodate  to it, yet Russia is keen on avoiding the problem. Putin signs the amendment decree about the budget setting, allowing to use an extra revenue from the oil sale deals with the price of $96 per barrel. This condition is meant to accumulate the money for business support, to be used for lending to local businesses which suffer losses because of the sanctions regime. There is no evidence supporting their optimistic economy projections. The market prices continues to fall and nothing makes them rise. Russia's scenario of rising oil prices, required for enacting the business support programme is useless at the times when the business community especially needs it.

A week ago Urals oil price dropped to a $86 p/b and Russia's Minister of Finance reports that the 2015 state budget might use "up to" 500 billion RUB of the Reserve Fund savings to mitigate the losses to government programmes. This amount of money (the $12,3 billion) does not constitute a significant loss to the state funds, but Russia's dependency on oil exports is likely to produce a strain to the vulnerable economy. It is clear at this point that Russia's reserve funds are not likely to be filled with extra revenues in the upcoming period. Hence, Russia is going to increasingly rely on the fund's savings if the sanctions are not lifted in the remaining months of 2014.

Russia's prospects 

Now it is time to consider Russia's pessimistic forecast for 2015 and the later period. MK assumes that it will take just 2-3 years to devastate the funds if the oil becomes any cheaper and the Western sanctions are maintained during these years. Regardless of Kremlin's public attempt to appear as one considering the cut in budget spendings, surprisingly the policy remains the same. Medvedev only promises to increase the public spending by 2017. On the other hand, the military expenditures rises again, reaching the mark of $80 billion for the next year. To appease the public, Nabiullina's declares that the worst case scenario of oil prices hitting the $60 price p/b is "unlikely" for some unstated reason. Hence, despite the need to solidly address the unpleasant perspectives for Russia's economy, the Head of Russia's Central Bank does not seem to panic, at least publicly.

The Moscow Times: Elvira Nabiullina - Head of Central Bank

To reiterate the point, the price of $60 p/b is not at all such a figurative and "unlikely" possibility. It does not give Russia enough time to speculate and dream, especially considering Russia's vulnerable economy model. Sadly for Russia, it is likely that the oil prices will further drop. The trend is significantly due to the increasing oversupply, coupled with Saudi Arabia's aggressive competition policy and Libya's reintegration into the oil market. The latest price for Urals oil is $81.50 p/b. While Russia cannot mitigate the oil prices to its advantage, it still can soften its foreign policy stance regarding Ukraine to stop the damage from the sanctions regime. Nonetheless, Putin does not consider it seriously as he chooses to arrive at the meeting with Angela Merkel 4 hours later than intended.