OIL PRICES PLUMMETING: Russia - most likely to enter recession in 2015

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As the oil price had fallen below the USD 80 threshold and then below USD 60 and the ‘war’ on the market seems to be just at the beginning, Russia has become one of the main victims. The latest evolutions of the oil market are not part of the US and EU sanctions against Moscow for the annexation of Crimea and its role in eastern Ukraine, but play the part in a most consistent way. The ruble fell by more than 45 percent, while the foreign capital leaving the Russian Federation was expected to reach no less than USD 125bn in 2014, according to the Russian minister of economy Alexey Ulyukayev. For 2015, expectations peak to USD 90bn. On the other hand, the estimated costs of sanctions and falling oil prices to Russia are of USD 140bn a year, Russian Finance Minister Anton Siluanov said.

For Urals crude price less than USD 80 per barrel, Russia is to enter recession. From June to December the oil price has fallen by 40 percent and OPEC agreed by the end of November 2014 to maintain the level of production. As half of Russia’s budgetary incomes come from oil and natural gas exports, there’s no surprise. Rumours have become more and more real as even officials admit there is a chance of 75 percent that Russia enters recession in the following 12 months.

The European Council in December 2014 adopted new sanctions against Crimea, targeting Russian Black Sea oil and gas exploration and tourism. Similar sanctions were envisaged by the US and Canada. The Russian central bank double overnight the reference interest rate to no avail, as the ruble continued to fall, leaving Russians in disarray. The Russian central bank has cut the perspective of economic growth to zero percent for 2015, while inflation is expected to remain high. The inflation rate peaked to 9 percent in Q4 2014 and is expected to reach 9.3 percent in Q1 2015. But forecasts are changing rapidly. In this context, the Russian economy ministry issued its forecast at the beginning of December, pointing to 0.8 percent negative growth of GDP in 2015. In his state of the nation speech at the beginning of December, Russian President Vladimir Putin has warned Russians of hard times ahead. By offering ‘full amnesty’ for the capital returning to Russia, he indirectly confirmed the Russian economy’s poor shape and its need to financing and capital influx. Putin also proposed a four-year freeze on tax rates. Western nations want to chain ‘the Russian bear,’ pull out its teeth and ultimately have it stuffed, Russian President Vladimir Putin warned. He said anti-Russian sanctions are the cost of being an independent nation.

It’s all in the oil price?

There’s much talk about a so-called war between the US and Saudi Arabia on the international oil market, involving OPEC countries, market shares, shale gas exploitations, etc. On the other hand, one should not forget the Saudi Arabia is a strategic partner of the US and military cooperation is enhanced by partnerships. Analysts say the oil war is only a smoke screen for hitting countries like Iran, Venezuela and mainly Russia, whose revenues are based on oil and are also under the sanctions’ strain. Oil-rich Gulf states have vowed not to cut crude production, blaming speculators and producers outside the OPEC group for tumbling prices. Saudi Arabia’s Oil Minister Ali al-Naimi said “the spread of misleading information and speculation” had contributed to the 40% price fall. Yet, only few were convinced by his speech.

The former vice-governor of the Russian central bank Oleg Vyugin, now head of the MDM Bank board, is convinced the US and Saudi Arabia conspired to bring oil prices to USD 70 levels. “The US are about to get the edge on the market and have warned Saudi Arabia they’d better change their price policy to keep their market share. According to Vyugin in this way the Saudis would keep their market share, while the US is bound to promote its political agenda.

The perspective of recession for Russia is enhanced by the sanctions, the Rosneft, Gazprom Neft and Transneft lack of access to international financing. Furthermore, Exxon has given up exploration with Rosneft in the Arctic area, Shell Oil has given up the cooperation with Gazprom Neft, while Total the one with Lukoil. According to Moscow Times, the main issue is related to budgetary revenues and it seems the Russian state is beginning to fight its own companies for scarce resources. On the other hand, international analysts say US companies could better manage a low oil price than the OPEC countries and Russia, as the others need revenues to balance their budgets.

On the background of falling prices, turmoil is getting on the Russia companies on the domestic plane. At the beginning of November 2014 three of Russia’s largest oil companies were being investigated on suspicion that they colluded to push up domestic fuel prices, the Federal Anti-Monopoly Service revealed. State-owned oil giant Rosneft and privately owned oil companies Bashneft and Lukoil allegedly worked together to manipulate fuel prices on St. Petersburg’s commodities exchange. “This situation was one of the reasons for the rise in prices in the retail segment of the oil products market,” said Federal Anti-Monopoly Service official Dmitry Makhonin. The cost of gasoline in Russia has risen by up to 10 percent this year, above the level of inflation.

Some wonder when social unrest will start in Russia. Others say President Putin’s days are numbered. What’s certain is that hard days are coming for Moscow.

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December/January 2015

June 2017