Bloomberg News

Russia Sees Stalling Economy, Ruble Plunge at $60 Oil Price

September 13, 2011

(Updates with Putin’s comment in 12th paragraph.)

Sept. 13 (Bloomberg) -- Oil at $60 a barrel may halt Russia’s two-year economic expansion next year, triggering a “substantial” devaluation of the ruble, the Economy Ministry said, according to a document obtained by Bloomberg.

Gross domestic product may shrink as much as 1.4 percent next year under a negative scenario that projects a “world recession” cutting the average price of Urals crude by almost a half from the current level, according to the report, submitted to the government for approval last week. The price of Urals, the nation’s chief export oil blend, has averaged $109.35 this year and was at $114.23 yesterday.

A reliance on raw materials, which President Dmitry Medvedev called “humiliating” and “primitive,” has left the economy vulnerable to dropping global demand for its commodity exports. Russia’s sovereign rating, which was last raised by Moody’s Investors Service in 2008, is exposed to sudden changes in the price of oil, Fitch Ratings and Standard & Poor’s said as they kept the credit grade unchanged in the past two weeks.

Under the government’s base “moderate-optimistic” forecast, oil will average $108 this year, $100 in 2012 and $97 in 2013, supporting growth of 4.1 percent this year, 3.7 percent in 2012 and 4 percent in 2013, Deputy Economy Minister Andrei Klepach said Aug. 27. The ministry previously expected growth of 4.2 percent, 3.5 percent and 4.2 percent.

Svetlana Glikman, a spokeswoman for Economy Minister Elvira Nabiullina, confirmed that the document was last week submitted to the government’s budget committee chaired by Prime Minister Vladimir Putin, where it was discussed last night.

‘Patient on a Drip’

The U.S. economy is “resembling a patient on a drip” and a default by a European Union member will create “systemic risks,” leading to the “next profound crisis,” Finance Minister Alexei Kudrin said in St. Petersburg Sept. 10.

Kudrin estimates the chances of “a second wave” of the global economic crisis at more than 25 percent.

Russia, the world’s biggest crude producer and largest energy exporter, needs higher oil prices than Saudi Arabia to balance its budget, Deutsche Bank AG estimated in June. Economic growth is lagging behind emerging-market rivals Brazil, India and China.

The country’s reliance on oil and natural gas means it doesn’t belong among the so-called BRIC nations, Nobel economics laureate Paul Krugman said in an interview last week.

‘Petro-Economy’

“Russia really doesn’t belong in the group, it’s a petro- economy in terms of world trade,” Krugman said. “There are a lot of people and a lot of technical skills and at least potentially Russia could be a part, but its role in the world right now is not at all similar to China.”

Oil and gas account for 17 percent of Russia’s GDP compared with less than 10 percent in Brazil, and contribute about 40 percent to government revenue.

Urals has gained about 24 percent this year, reaching $122.88 on April 8, the highest price this year, according to data compiled by Bloomberg. Windfall revenue may allow Russia to run a balanced budget this year and narrow its deficit to below 1.5 percent in 2012, Putin said at a meeting yesterday.

Keeping Pace

Medvedev is targeting annual growth of at least 8 percent within 5 years to keep pace with the other so-called BRIC countries. GDP expanded 4 percent in 2010 after a record 7.8 percent contraction the previous year, when Urals averaged about $61. Russia posted an average growth rate of almost 7 percent from 1999 to 2008.

The economy expanded 3.4 percent from a year earlier in the second quarter, compared with 4.1 percent in the previous three months, the Federal Statistics Service in Moscow said Aug. 11.

The country’s economic expansion accelerates by about half a percentage point for every $10 advance in the price of oil, Klepach estimated last year. The country needs oil to average more than $60 a barrel this year to ensure a sustained recovery from its record slump in 2009, Kudrin said in October.

Brent, the oil blend that underpins prices for Russia’s Urals, may average $114 next year, according to the median forecast of 37 analysts surveyed by Bloomberg. It may drop to $90 next year, Citigroup Inc. predicts, while Landesbank Baden- Wuerttemberg and Sanford C. Bernstein & Co. expect Brent to trade at $90 in 2012.

After expanding every year since 1998, Russia’s economy contracted in 2009 after the credit crunch and global slowdown that followed collapse of Lehman Brothers Holdings Inc. crimped demand for commodities, sending Urals to as low as $32.34 a barrel on Dec. 24, 2008. The decline was a 77 percent drop from a high of $142.50 in July that year.

The central bank drained more than $200 billion, or about a third of its international reserves, in the six months through January 2009 to stem a 35 percent devaluation of the ruble to the dollar.

Stress tests by the central bank in 2009 showed the country’s lenders can weather a slump in the price of oil to $25 a barrel if they keep debt at close to 20 percent of their total liabilities.

--Editors: Paul Abelsky, Alan Crosby, Andrew Langley

To contact the reporter on this story: Alena Chechel in Moscow at achechel@bloomberg.net.

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net.


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