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Russia sees recession if oil price falls to $60

Russia’s economy will sink into a recession next year if the price of oil slumps to $60 a barrel and the U.S. and its allies tighten sanctions over the conflict in Ukraine, Finance Minister Anton Siluanov said.

The economy of the world’s largest energy exporter won’t grow faster than 1 percent in 2015 even if oil prices hold steady and the severity of sanctions remains unchanged, Siluanov said in an interview in Singapore. The price of Brent has slumped by almost a third this year to below $80 a barrel.

“Recession is inevitable in 2015 if the situation worsens,” Siluanov said. “If the oil price declines to $60 per barrel, the economy will have negative growth.”

The comments add to signs of growing unease in Russia after President Vladimir Putin warned last week that the country is bracing for a potential “catastrophic” slump in oil prices. The decline in the cost of crude is exacting a toll on an economy already battered by the U.S. and the European Union’s restrictions imposed over the nation’s role in the Ukrainian crisis.

Economic output is growing at the slowest pace since a 2009 contraction, having expanded 0.7 percent in the third quarter from a year earlier. The central bank last week said that gross domestic product will probably stagnate in 2015. A recession would also force the government into a fiscal adjustment, Siluanov said.

“We’ll have to take a more strict approach to the budget and use all our crisis-fighting tools,” Siluanov said. “We’ll have to adjust our budget strategy and review priorities. All social obligations will be met. Nobody plans to revise them, but second-tier priorities will be postponed.”

Brent, the grade traders look at for pricing Russia’s main export blend Urals, has fallen 28 percent this year. As the market enters a period of weaker demand, the price may fall further in the first half of the next year, according to the International Energy Agency.

There’s a 70 percent chance of a recession in the next 12 months, according to the median estimate of 27 economists in a survey Oct. 30. That’s the highest since Bloomberg started tracking the figure two years ago, up from 60 percent last month.

Even so, Russia predicts the decline will be more moderate than in the wake of the collapse of Lehman Brothers Holding Inc., when the country’s economic output plunged 7.8 percent, Siluanov said.

“The drop in oil prices and the economic contraction won’t be as serious as we had in 2008-2009,” Siluanov said. “Growth will recover after the economy adapts to new conditions.”

The Russian economy will remain stable even under the “unfavorable” conditions of oil at $80 a barrel and sanctions staying in place until the end of 2017, central bank Governor Elvira Nabiullina said Tuesday in the lower house of parliament in Moscow.

The ruble exchange rate depends “directly” on energy prices, she said.

The Bank of Russia, which estimates GDP will expand 0.3 percent this year, last week said that growth may be zero next year as the economy succumbs to sanctions, while the weakening ruble ignites inflation and lower oil prices erode export revenue. The regulator forecast that sanctions will last through 2017 and oil will average $95 a barrel, compared with an estimate of $102 this year.

Under current conditions of the ruble at about 47-48 per dollar and crude near $80 a barrel, oil and gas revenue that accounts for half of the budget will meet the targets in next year’s draft, according to Siluanov.

The budget deficit will be 0.6 percent of GDP in 2015 after this year’s surplus of 0.1 percent to 0.3 percent, according to the ministry’s estimates. Federal revenue and spending may be balanced with an oil price of $90 per barrel next year, according to Siluanov.

“A decline to $70 per barrel, or maybe to $60 per barrel, won’t be a long-term trend,” Siluanov said. “Most likely, the price will be within a range of $80 per barrel to $90 per barrel next year.” (Bloomberg)

Published on:
November 19, 2014
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