Higher oil prices: Blessing or a curse for Moscow?

A drilling rig at the Southern Priobskoye oil field of the Gazprom Neft.

A drilling rig at the Southern Priobskoye oil field of the Gazprom Neft.

Vladimir Smirnov/TASS
Rising crude oil prices could impede Russia from bucking its oil addiction. More expensive oil would, however, help reduce the country's budget deficit and also stop budding import substitution programmes from taking root, and development of domestic production.

As global crude oil prices rise, the International Monetary Fund has marginally improved its forecast about the Russian economy. The IMF forecasts that, in 2016, Russia’s GDP will fall by 1.5 percent instead of the 1.8 percent earlier predicted.  In 2017, the Russian economy will grow by 1 percent instead of 0.8 percent.

While this is definitely good news, it also raises concerns among a host of Russian politicians and economists. The rise in oil prices strengthens the Russian national currency (against which the Central Bank is consistently taking measures) and considerably cheapens imports, raising a threat for exporters while making production in Russia disadvantageous.

Also, the growth in oil prices threatens to stop the country from carrying out economic reforms without which, in the view of many experts, the Russian economy will not be able to develop effectively.

Central Bank Chairperson Elvira Nabiullina has remarked earlier that even with a price of $100 a barrel of crude, Russia's GDP would not be able to grow by more than 1.5-2 percent, unless structural reforms are implemented.

Benefits for the budget

"Soon we may see a unique situation on the oil market: the shortage of supply to satisfy demand," said Stanislav Verner, vice president of IFC Financial Centre. He said unforeseeable circumstances were to blame: rebel activity in Colombia and Nigeria, forest fires in Canada and the strike in Qatar were all to blame.

As a result, during trading in Asia on April 20, North Sea Brent futures grew by 0.5 percent to $49.1 a barrel, or close to the benchmark on which the Russian budget is based – $50 a barrel.

"The growing quotes on crude naturally have a positive effect on the Russian budget," said Semen Nemtsov, analyst at Russ Invest, a financial services company.

In comparison, with an average annual oil price of $40 a barrel, the Russian budget deficit would be four percent of the country's GDP, Alexei Ulyukayev, Russia’s Economic Development Minister recently said.  

Also, when the ruble strengthens, import and tourism services become cheaper. Oleg Safonov, head of Rostourism, said earlier this month that Greece would be the most popular destination among Russian tourists in 2016. Despite its economic woes, the country remains within the Eurozone and the ruble's recent rally against the euro makes travel to Greece more accessible for Russians.

Reforms may be cancelled

However, increasing oil prices and a costlier ruble are not good news for everyone. The growth of the national currency puts domestic producers in a difficult position. In 2014, when the ruble was falling, the country put in place an import substitution programme.

The higher cost of imports gave Russian producers obvious advantages and they began to augment domestic production. So in March 2015, when the ruble strengthened by 10 percent against major international currencies, the Central Bank took measures to limit its further growth.

The cheap ruble has also paved the way for the potential reformation of Russia's economy and the development of Russian domestic production.

In an interview with RIR earlier, Vladimir May, one of the country's most authoritative economists and rector of the Russian Presidential Academy of National Economy and Public Administration, said low oil prices had given the Russian government an opportunity to carry out reforms to raise the economy's effectiveness and reduce its dependence on the sale of energy resources.

If the prices of energy resources rise, the government may be tempted to shelve these required reforms. Plans to postpone structural reforms of the economy have already been developed by President Vladimir Putin's advisors, wrote the Vedomosti business newspaper on May 20.       

Analysts, however, do not expect a drastic increase in oil prices in the future.

"In the second half of the year we expect a decisive restoration of oil prices," said Bogdan Zvarich, an analyst at Finam investment holding. By the end of the year the price of Brent crude is likely to be around $50-55 a barrel, he said.

Ivan Kapitonov, Professor at the Russian Presidential Academy of National Economy and Public Administration’s Higher School of Corporative Management, said it is unlikely Brent prices would exceed $50 a barrel.

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