On Tuesday, we took a close look [9] at the forecast for the Russian economy given various assumptions about the price of oil in 2016.
While Russia has thus far managed to weather the crude storm relatively well (indeed, Moscow is now pumping more crude than ever before [10] and expects oil exports to rise for the first time in six years in 2015), the numbers do not lie.
The ruble is plunging in the face of the oil price slump and if prices hit $30/bbl, the country’s budget deficit is expected to balloon from 3% of GDP to some 4.4% - that would be the second largest deficit in two decades. Indeed, the Russian central bank itself says that in an adverse scenario wherein oil trades at $35/bbl in 2016, GDP will contract by 5% and inflation will run at 7-9%. Say what you will about the country’s penchant for resilience, but that isn’t a pretty picture. The rumored return of former FinMin Alexei Kudrin to the government is evidence of Moscow’s attempts to find a solution sooner rather than later.
The interesting thing about Russia’s budget for 2016 is that it’s based on oil prices of $50/bbl. It’s not entirely clear how realistic that is.
For instance, the Saudis are likely basing their 2016 budget on considerably lower prices.
As we outlined in great detail [11] earlier this week, Riyadh is expected to run a 13% deficit in 2016. That's actually in line with expectations and comes on the heels of a better than expected 2015 when the red ink somewhat inexplicably came in at between 15% and 16% of GDP as opposed to the 20% the market was expecting. That’s bad news for prices as it means the Saudis are holding up better than most observers anticipated. Riyadh can thus continue its war of attrition with the US shale complex for longer.
Also, remember that Saudi Arabia came into 2015 with virtually no debt, which means they can borrow to offset the SAMA burn. At $30/bbl, Saudi Arabia could hold out for nearly two years with no subsidy cuts and more than 3 years as long as they finance 50% of spending in the debt market. Now that the subsidy cuts are a reality, those figures rise materially:
[12]
Here are some estimates from various analysts regarding what price Riyadh is likely assuming for 2016 based on the budget released this week:
- Deutsche Bank: Revenue for 2016 is projected at USD137bn (-15% YoY) due to lower projection on oil price (USD36.5/bbl assuming no increase in non-oil revenues).
- Citi: We think the government’s revenue forecast is based on a Brent price of $40 per barrel in 2016.
- BofAML: Budgeted revenue numbers would be consistent with an internally budgeted oil price assumption of cUS$45/bbl on our estimates, and the budget itself would breakeven at cUS$80/bbl.
- Riyadh-based Jadwa Investment: $29/bbl.
Meanwhile, we learn on Wednesday that Kuwait is expecting crude revenue of 7.16b dinars in 2016/2017 budget which translates to around $30/bbl, according to Alrai newspaper.
Given all of the above, one certainly wonders if Russia’s $50/bbl projection is realistic. Sure enough, it looks as though Russia may lower its estimate. “Russia may cut its oil-price estimate for the 2016 budget next year, possibly following other crude-exporting nations as the commodity, which makes up about 40 percent of the country’s budget revenue, nears 11-year lows,” Bloomberg reports [13], citing the Russian Finance Ministry. Here’s the official word from Finance Minister Anton Siluanov:
“We should be ready for any oil price developments -- our estimates for next year are for about $40 a barrel for budget calculations. We’ll prepare proposals to review fiscal plans at the end of the first quarter if the situation doesn’t change.”
If Citi is correct, every $10 move in crude translates to around 0.7% on the deficit for Russia and believe us, the Saudis are happy to press the issue. Case in point: just moments ago, the kingdom’s oil minister Ali al-Naimi told reporters that his government's production policy "is reliable." "We won't change it," he added.
And in case that wasn't clear enough, he continued: “We will satisfy the demand of our customers. We no longer limit production. If there is demand, we will respond. We have the capacity to respond to demand."
The result:
So "lower for longer" it will be.
The only question is which country's populace rises up first. The Russians, struggling under persistently high inflation and a plunging currency, or everyday Saudis, who just had the subsidy punchbowl pulled away.
