Falling oil prices are putting pressure on the Russian budget and may drive the country into recession.
“If the market starts incorporating new oil prices to sustain at least for more than just a few months, then the chances are that Russia will not be able to avoid recession and that’s one of the reasons why we see Russian assets plummeting so heavily – those fears of recession,” Slava Smolyaninov,chief strategist at UralSib Financial Corp in Moscow, told New Europe on October 16.
Russia, already pressured by inflation and a steep decline in the ruble, has found its ability to borrow money constrained by Western sanctions.
“It’s really difficult for Russia to be meeting its budget targets, for the economy to be expanding – in fact it won’t and if the economy is moving from stagflation conditions to proper recession that is a complete different case for financial assets, for equities, for Russian stocks and bonds,” Smolyaninov said.
Russia is being hit by the fears of European recession. “Now the threat is more material than ever over the past couple of years that an economy can go into recession,” he said.
He added that Western sanctions against Russia, primarily on the oil sector, leave very little confidence for investors in Russian assets, in Russian stocks.
Falling oil prices is not good news for non-OPEC member Russia, where the economy is under pressure from Western sanctions, Smolyaninov said.
At a meeting in Moscow this week, Russian President Vladimir Putin acknowledged that “energy prices have fallen as well as for some of our other traditional products”.
Many observers and analysts will be waiting for the next meeting of the Organization of Petroleum Exporting Countries (OPEC) in late November to see if the oil cartel will cut production.
The steep decline in oil prices is straining the budgets of major petroleum-exporting countries around the world. “Obviously some members are already feeling the pain like Venezuela,” the UralSib chief strategist said. On October 10, Venezuela called for an emergency OPEC meeting. The next one is scheduled for November 27.
Lower prices have also pushed the budgets of Saudi Arabia, Libya and Iraq, which is already struggling to finance its fight against the Islamic State, into the red. They have also deepened budget deficits in oil-exporting countries of Venezuela, Nigeria and Iran.
With global oil prices falling, OPEC-kingpin Saudi Arabia has cut prices instead of cutting production.
The move fueled conspiracy theories about American and Saudi collusion against the Soviet Union during the Cold War with the vice-president for Russian state-controlled oil company Rosneft accusing Riyadh of secretly manipulating prices.
“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,” Russian media quoted Mikhail Leontyev as saying.
The price of a barrel of Brent crude, a global benchmark, was $83.78 on October 15, down from about $115 per barrel since its high in June.
Signs of a Chinese economic slowdown and decreased North American demands given the glut of oil there means OPEC members are fighting for market share.
Riyadh is now competing more vigorously with Russian and West African exporters for the Asia market. It is also competing against deeply discounted Canadian oil sands production for US refiners along the Gulf of Mexico.
OPEC production has climbed to a 13-month high, bolstered by a recovery in Libya and higher Iraqi output.
OPEC also said member state Iraq produced 3.16 million barrels of oil per day in September, up 4.4% from the previous month. Much of Iraq’s oil sector has beenspared from violencefrom the insurgency waged by the Islamic State of Iraq and al-Sham (ISIS). Most of the export terminals in Iraq are in the south of the country, far from away the territory controlled by the terrorist group.
http://www.neurope.eu/article/sinking-oil-prices-spike-recession-fears-putin%E2%80%99s-russia