The Oil Price Plunge Is Forcing Russia to Slash Government Spending

Mikhail Mordasov/AFP/Getty Images

Photo by: Mikhail Mordasov/AFP/Getty Images

The 7-month-old plunge in oil prices will force Moscow to cut its budget for 2015 by 10%, perhaps even 15%, a senior Russian government official told a panel discussion at the World Economic Forum in Davos, Switzerland.

Russia, the world’s largest producer of crude, traditionally has relied heavily on oil revenues to run its government, but Deputy Prime Minister Arkady Dvorkovich said January 21 that it is easing that reliance by tapping its currency reserves to make up for some of the revenue shortage.

“A few years ago we decided to establish a macro framework [of financial reserves] where dependence on oil price is lower than before,” Dvorkovich said. In 2015, though, Moscow decided that the reserves also should be used to shore up the stability of Russia’s banks because “no one expected prices to go down so sharply,” he said.

To keep from spending more money than it has, Russia plans to “reduce the budget by maybe 10 to 15 percent,” Dvorkovich said. His words elaborated on those of Russian Finance Minister Anton Siluanov, who said a week earlier that Moscow was prepared to “make decisions on optimizing expenditures.”

Oil now costs around $50 per barrel. Moscow’s preliminary budget for 2015 had been predicated on revenues from oil at $100 per barrel.

Russia also faces unexpected inflation. Deputy Economic Development Minister Alexei Vedev said Jan. 14 that inflation for the current year would reach its peak of between 15% and 17% in March or April. That’s as many as seven percentage points higher than the Russian Central Bank had forecast as recently as December 2014.

Part of that problem is the erosion in the value of Russia’s currency, the ruble. It was down 41% against the U.S. dollar during 2014 as a result of the plunge in oil prices, the flight of capital from Russia and economic sanctions imposed by the European Union and the United States over Russia’s treatment of neighboring Ukraine.

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In Davos, Dvorkovich said a return to stable oil prices would help restore the ruble to a more realistic value.

In fact, Dvorkovich said, Russia may find itself reducing oil production by as much as 1 million barrels per day, but he stressed that such a cut would not be made in coordination with OPEC. Instead, he said, low prices may simply make some Russian oil projects temporarily unprofitable.

Oil output in Russia averaged 10.6 million barrels per day in 2014 – a post-Soviet high – but the drop in prices and the Western sanctions have threatened this important source of government income.

“If the oil [price] stays at $50 for a long time, of course some projects will become less attractive and a small output decline may start. But we will not cut production on purpose,” Dvorkovich told Reuters on the sidelines of the forum. “We could lose at maximum a 10th of output but more likely 300,000 to 400,000 [barrels per day]. There are no grounds for a bigger decline.”

In fact, Dvorkovich confidently told Reuters that Russia could balance its budget regardless of the price of oil, which he said will probably remain low for a long time.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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