Russia will struggle to avoid falling into a recession if oil prices are allowed to drop to $US80 a barrel — and could face calamity if prices fall below that level.
Brent crude oil prices have fallen from a June high of $US115 a barrel to just over $US86 a barrel Wednesday. This poses a huge problem for Russia as oil and gas account for around two-thirds of total exports from the country:
Morgan Stanley estimates that “every $US10 fall in the oil price means a $US32.4 billion fall in oil and gas exports, which is equivalent to about 1.6% of GDP” and around a $US19 billion fall in government budget revenues.
So using these rules of thumb, the recent oil price falls could have wiped out 4.8% of potential GDP growth and knocked almost $US60 billion off Russia’s budget revenues.
So what if it were to continue?
Morgan Stanley estimates that at $US80 a barrel — which the investment bank gives a 45% probability — the government’s budget deficit would increase to 2% of GDP next year, while inflation would continue to climb to 9%. The country would most likely fall into recession with GDP falling by 2% over 2015.
Under the far less likely scenario that oil were to fall even lower — to around $US50 a barrel — it could cause widespread disruption. Inflation would leap up to between 13-15%, while GDP would contract by as much as 6%.
Russian policymakers appear to think that the worst is over and that growth will start to pick up again next year, albeit at a gradual pace. This is what Morgan Stanley has to say about that:
We expect growth to stagnate, as uncertainty restrains investment and consumption, with the public-sector wage freeze posing a downside risk to consumption. We expect inflation to remain above target, as a result of import restrictions and the weaker RUB pushing up inflation and inflation expectations. We expect reserves to continuing contracting as a result of high capital outflows, and the use of the Reserve Fund to finance the deficit.
It looks set to be a cold winter indeed for the government in Moscow.