Russia’s economy and the price of oil are inextricably linked.
The country relies hugely on the oil and gas industries, with more than 50% of total government revenues coming from the sector.
That means that since the price of oil started to crash in mid- 2014, Russia’s economy — which is also feeling the squeeze from Western sanctions — has been in the midst of a battle for survival.
The price of of oil doesn’t look to be going anywhere soon, despite chatter last week that OPEC and Russia may be considering a production cut sending prices soaring briefly. At the time, Russia’s biggest oil company Rosneft, described a rally in the oil price as “idiotic”.
Continuing low oil prices can only mean one thing for Russia — more pain.
In the latest of a series of notes on the oil crash in non-OPEC nations, analysts from Bernstein Research — led by Dr. Oswald Clint — have shed light on just how much trouble the current oil price crash is causing the Russian government, with a heap of great charts to illustrate that point.
The note argues that the government’s finances are in their worst position in more than a decade, which is quite some feat given that the country underwent one of the most severe recessions in its history, only six years ago.
Things look so bad that Bernstein describes the country’s finances right now as “going off a cliff” adding (emphasis ours):
It is unlikely that this situation will reverse itself unless there is a significant increase in oil prices or a removal of sanctions which lets the country access international debt markets openly again. None of these scenarios look likely anytime soon.
Check out the charts showing Russia’s pain below.
Russian GDP will continue in negative territory through 2016, just about returning to growth next year, and passing 1% growth by 2018.
The amount of money the Russian government can bring in is hugely dependent on the price of oil. As Bernstein puts it: “In Russia, government receipts remain very sensitive to oil prices.”
Russia spent in excess of $ 150 billion of its currency reserves in 2014, before the reserve rates stabilised last year. However, Bernstein predicts that the continuing decline in oil and the ruble, will force the government to spend more of its foreign cash.
One factor in spending currency reserves is the high cost of goods in the country. The falling ruble has also sent prices for consumers in Russia skywards, hitting their highest levels in nearly 15 years. Things are now even worse than in late 2014, when surging prices caused a so-called “buckwheat panic”.
Traditionally, the Russian sovereign wealth funds have been a “backstop” for the government, but the oil crash has forced money out of the funds, and reserves are depleting. As Bernstein puts it: “The sovereign wealth fund only looks to last for another 2 years or so at current rates of decline.”
Russia’s continuing involvement in Syria will also hurt the country’s finances significantly. Military spending makes up the largest proportion of government spending.
The export value of all oil and gas based produced in Russia has absolutely crashed in the past year, and Bernstein predicts the crash will continue.
As Bernstein points out: “Russia has been effectively cut off from raising foreign debt since the sanctions”, leading to surging levels of debt raised domestically. While this gives the government some flexibility over repayments, it isn’t sustainable in the long term.
It’s not universally negative though, and all of this bad news is offset a little by the fact Russia continues to have a historically low debt-to-GDP ratio, something Bernstein pessimistically calls “the only positive for the country.”
The post These 8 charts show how catastrophic the oil price crash has been for Russia appeared first on Business Insider.