Russia Bullish on Economy Despite Plunging Oil Prices

Despite oil prices falling well below the country's break even price of $100 per barrel, the Russian government is bullish about the stability of its economy.

Brent crude this morning (16 October) dropped below $83 – a four-year low, meaning it has lost more than 28% of its value since June 2014 and raising fresh concerns over the stability of the world's oil producing nations.

The Russian Finance Minister Anton Siluanov said that the government has the requisite budget reserves to last through potential worsening situations in 2015, saying: "We created the Reserve Fund specifically for this purpose and kept accumulating foreign exchange reserves."

The International Energy Agency has forecast that prices will continue to suffer into 2015, as demand across global economies continues to weaken. This week its 2015 estimate has been cut by 200,000 barrels a day.

As reported by ITAR-TASS, the fund was established to pool surplus oil revenues as a backup plan for such crashes in oil prices.

Siluanov said: "First, we'll bring the budget into compliance with new realities. We're working as part of the commission for budget efficiency and optimizing programs to adjust the budget to the economy's real possibilities. Second, the budget has a reserve which will be used. Third, we'll use the Reserve Fund."

Siluanov's comments came a day after President Vladimir Putin confirmed that his government is considering budget cuts in an effort to stave off the effects of the oil crash.

Analysts however are sceptical as to the measures Russia can take to stop the rot in its economy.

Liza Ermolenko, a Russia analyst at Capital Economics, tells IBTimes UK: "There isn't really much that the government can do - apart from simply using its FX reserves to stabilise the ruble and help companies repay external debt. Lower oil prices first of all mean lower budget revenues, which in turn leaves less room for any fiscal boost.

"If lower oil prices are sustained, this could be very costly for Russia – in terms of both, the budget and economic growth more generally. Of course, Russia's ample FX reserves mean the government could finance small budget deficits for some time, however, this could not go on forever.

"The key point is that the drop in the oil price has come at the worst of times – companies and banks were already struggling to repay their FX debts, as western sanctions have cut them off international financial markets, and ruble has been under pressure."

OPEC is set to decide whether it will reduce oil output for the first time since 2008 when it meets in Vienna on 27 November. Cutting production levels would allow the cartel to restore the price to the $100 per barrel benchmark. Analysts have warned that without intervention, the price could plunge below $80 a barrel.

As IBTimes UK reported yesterday, the fall in price could, conversely, have a positive impact on the US and EU. Paul Ashworth, Chief US Economist at Capital Economics, said that "we would still argue that the declines in oil prices and long-term interest rates will provide a net boost to real US GDP growth, even after allowing for the sell-off in stock markets".