Another drop in oil prices in early 2016 has raised questions about the stability of the Russian economy. In this report we review the potential consequences of a $30/barrel scenario for the general economy, the public sector and the oil & gas industry.
In such a scenario another year of recession is inevitable. We estimate that the Russian economy needs a $45/barrel average Urals price in 2016 in order to show positive GDP growth. We presume the decline in GDP will amount to 2.0-2.5% with oil prices in the $30-35 range. But last year has shown that the economy has the ability to adapt to external shocks with the help of the floating FX regime, a relatively tight monetary policy and quick changes in consumer behavior. The key mechanisms of the adaptation are connected to sharp decreases in personal consumption and a decline in imports because of the weaker RUB.
Inflation is sure to stay high. According to our estimates, if oil prices remain within $30-35 per barrel the inflation rate will not fall below 9-10%. The current medium-term inflation goal of the CBR (4% by 2017) will not be reached in this scenario. But at the same time, weaker domestic demand combined with tight policy provides anti-inflationary pressure. The CPI fell to 9.8% y-o-y in January 2016.
The federal budget deficit in 2016 will amount to 3.5-5.0% of GDP if expenditures are not optimized. This is a significant deterioration in the financial situation in comparison with 2015 (-2.6% of GDP). However, it does not seem disastrous. The floating FX regime and growing inflation enables the budget to collect VAT and duties, even with lower oil & gas revenues. Expenditure optimization and additional revenues from the privatization of some state companies – both options are on the table – will provide additional support to the fiscal balance.
The oil & gas sector has shown a great deal of resilience over the last two years, helped by a flexible tax system and cost optimization. But there are growing risks of an extra tax burden for the industry because of the deteriorating fiscal situation. According to announcements by major companies, the sector does not plan to cut investments in 2016, even with lower oil prices. But if additional taxes for the industry are implemented, those plans may change.
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