The vice-president of Russia’s state-owned oil behemoth Rosneft has accused Saudi Arabia of manipulating the oil price for political reasons. Mikhail Leontyev was quoted in Russian media as saying:
Prices can be manipulative. First of all, Saudi Arabia has begun making big discounts on oil. This is political manipulation, and Saudi Arabia is being manipulated, which could end badly.
The news comes as Reuters reports Saudi officials have been privately admitting to oil market participants that they are comfortable with lower oil prices. According to the news service, the Organisation of the Petroleum Exporting Countries (OPEC) is willing to accept prices as low as $US80 a barrel for as much as the next two years.
Falling prices are of particular concern to Russia. Russia needs high oil prices to buoy its economy. The country has seen its economic performance slow under the weight of sanctions over Ukraine and weakening domestic demand. The Russian Central Bank forecasts growth over 2014 to be a meager 0.4%, improving marginally to between 0.9%-1.1% in 2015.
The problem is that Russia’s latest budget requires oil prices to average at least $US100 a barrel in order to cover the government’s spending promises. The government already needs to borrow around $7 billion from foreign investors next year and as much as 1.1 trillion rubles ($27.2 billion) from domestic investors. Given the country’s sanctions-imposed isolation from international bond markets, any additional borrowing would be a big concern for policymakers in Moscow.
Finance Minister Anton Siluanov has already acknowledged that the budget forecasts for both Russian GDP growth and oil prices are “optimistic.” During the Reuters Russia Investment Summit in September he was quoted as saying:
There are risks to economic growth rates. It is a rather optimist forecast; there are risks to oil price. Without a doubt, this and the next year we will have to try very hard to ensure the planned growth rates.
If the forecast growth fails to materialise and the oil price continues its slide it could force the Russian government into an embarrassing retreat on spending commitments and increase the country’s economic woes.