The ongoing slide in global oil prices could tip Russia towards budget and trade deficits, threatening its thus-far stellar growth and potentially its currency as well.
Russia, the world's No. 2 oil producer behind Saudi Arabia, has soaked up billions of dollars in windfall revenues as crude prices raced above $140 a barrel. But prices have since slumped beneath the level needed to balance next year's budget. If those levels hold, the government must either tap its rainy-day reserves or rein in a spending spree that's been central to economic growth.
"The question is whether the state is ready to start spending its savings," said Natalya Orlova, chief economist at Alfa Bank in Moscow.
Those savings now total $190 billion and are housed in two sovereign funds - one specifically designed to plug fiscal gaps in case of dips in the oil price; the other to support the pension system.
The first, the Reserve Fund, contains around $140 billion. The Finance Ministry, which manages it, has no plans to dip into that cash just yet because the average Urals blend oil price should stay above the $70 average needed to balance this year's budget.
The outlook for 2009 is more uncertain. Under existing plans, the government sees oil and gas revenues providing around a third of its $280 billion budget.
But those calculations assume an average price of $95 a barrel, well above existing levels, which analysts say are susceptible to further downward pressure should a global recession come to pass.
If oil prices remain at around $70, the budget would require additional money from the Reserve Fund. A prolonged drawdown from the fund could make Russia more vulnerable to future economic shocks.
Instead, the government could trim spending in 2009 when it discusses revisions to that year's budget in December.
"It's obvious revenues will be lower than we had originally planned," Finance Minister Alexei Kudrin said in Washington earlier this month.
Kudrin - the architect of the oil wealth funds and the flag bearer of fiscal prudence within the government - added that the country could easily cope with a price as low as $50 a barrel.
Russia has vowed to splash billions of dollars on an overhaul of decrepit Soviet roads and hospitals, spending that creates jobs and stokes activity in the construction sector, boosting growth in gross domestic product in the process.
"Russia's in a Catch-22 situation because its infrastructure is really deteriorating. The government needs to improve it in order to attract future investment and assure economic growth," said Chris Weafer, chief strategist at UralSib in Moscow.
"We would expect the government to stretch spending over a longer period of time, which would lead to lower growth," he added.
But it's not just growth that's at risk. Lower oil prices also threaten to erase Russia's current-account surplus, which could put pressure on the ruble exchange rate.
"We still expect the central bank to defend the ruble against the dollar-euro basket in the coming months, since the currency remains an anchor of private-sector confidence," said Goldman Sachs analyst Rory MacFarquhar. "But eventually, as outflows continue, we expect the bank to allow the ruble to adjust weaker."
Some have suggested Russia's reliance on oil revenues could be behind last month's surprise proposal for "extensive cooperation" with the Organization of Petroleum Exporting Countries.
That sparked speculation Moscow could decide to join a concerted production cut, which it did to stem a decline in prices at the end of 2001.
Iran recently called for oil-producing nations outside OPEC to join any action the group takes at its emergency meeting later this week.
OPEC Secretary General Abdalla Salem El-Badri visits Moscow Tuesday. Observers will be watching closely for signs of exactly what Russia wants from closer ties with the cartel.