Crude Economics
Russia Reeling From Oil Price Plunge

Russia is the world’s largest exporter of oil and gas, and that position has helped it wield influence abroad and grow domestically—or at least it did until the last year or so. Since last June the price of oil has plunged from over $110 per barrel to hovering around $55 today, and that’s threatening the solvency of a Moscow government that relies heavily on the hydrocarbon sales to balance its budget. Bloomberg reports:

Russia, which ING Bank NV estimates needs oil at $80 a barrel to balance its budget, will endure a two-year economic contraction if crude prices remain at $60 through 2016, according to the central bank.

“Russia will face a recession or stagnation next year” if oil is near $50, Dmitry Polevoy, a Moscow-based economist at ING, said by e-mail. “It will likely be necessary to cut spending more, to postpone a part of military spending and to use what remains in the Reserve Fund.”

Moreover, the global oversupply driving down prices doesn’t look to be going away anytime soon. Iran is getting ready to boost its own oil and gas exports at the prospect of the nuclear deal’s sanctions relief, and American shale producers continue to surprise OPEC with their resilience in the face of cheap crude prices. That suggests prices won’t be soon returning to their $100+ per barrel levels, much to Moscow’s chagrin.

This won’t just hamper Russian growth—it could also affect Moscow’s military budget as the prospect of spending cuts loom. If you live by energy markets, you can also die by them, too.

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