Bracing for an even more dramatic decline in oil prices that has slowed down the Russian economy and weakened the ruble, the Bank of Russia will include a “stress scenario,” assuming global oil prices at $40 per barrel, in its revised forecast of the economic situation in the country.
“The $40-per-barrel [scenario] is amonglikely scenarios that we are looking at,” Russian First Deputy Chair Xenia Yuadaeva has told reporters inMoscow.
The worst scenario previously considered bythe Central Bank was the oil price dropping to $60 per barrel.
In November 2014, the Central Bank set an economic scenario assuming that oil prices would not fall far below $80 per barrel upto 2017. The Bank's base scenario suggested that prices would reach $95 per barrel in2015 and be corrected to $92 per barrel by2017.
Russia’s Sberbank President and former Economy Minister German Gref has said that world oil prices of $40 per barrel would not last a long time butwould remain atlevel ofabout $60-$70 forthe next few years.
The ruble trading is reacting very rapidly to the oil prices decline. Natalya Orlova, chief economist at Russia’s Alfa Bank, toldNew Europe on January 19 oil represents about 65% of the total assets and around 55% of the federal budget revenues.
“The ruble depreciation is a way to rebalance Russia’s current account. Unfortunately based on the figures we have for the last year this rebalancing is talking place through the import contraction. Last import was down 10%, including around 24% decline in December only, but at the same time, there is no positive response on the export side because the normal experts were also last year 4-5%,” Orlova explained.
“While a number of countries in case of their accounts deprecation find the way to enter new markets, in Russia the main effect of weaker rouble is just the decline of the imports. This is just the instrument to counterbalance the decline in oil prices, there is some import substitution which will take place but it will be rather modest,” she added.
Analysis from the World Bank in December finds the Russian economy will face difficulties through 2016 because of the decline in global oil prices.
Russian Prime Minister Dmitry Medvedev last week called all government hands to the deck to help the economyregain momentum, describing the current situation as “quite problematic”.
Orlova told New Europe that Russia has to make some structural adjustments regardless the level of oil prices. “In case of oil prices at $100 we have to make them and in case of oil prices at $40. This is the same challenge regardless the level of oil prices. Economy is no longer benefiting from a high oil-price environment because in fact all the additional money entering Russia at high level of oil prices translate to high inflation,” the Alfa Bank chief economist said.
At the moment the low level of oil prices definitely affects Russia’s GDP. “But you cannot really say that environment of low oil prices will dramatically change the outlook for the Russian economy as supposed to the environment of high oil prices. In both cases the Russian economy will be more or less stagnant,” she said.
Asked about structural changes, Orlova said Russia’s investment has declined for two years already so there is not enough capacity in the economy to produce more and there is lack of labour force. “The demographic sector you cannot change fast so as a result you basically have to do some steps to generate investment growth and the normal way to do this is to invite private capital because private capital is usually in a better position to identify the areas of growth. But this is not the agenda which you hear from the government. Actually, we don’t hear about any agenda,” Orlova said, adding that these are reforms are needed but won’t necessarily be implemented.
“It’s about the political will. We have seen in last 10 years of high oil prices did not really push Russia to make any structural changes. Now we might be in a period of oil prices for a while and I’m also not sure this will bring some structural changes. It’s all about internal will to generate structural changes,” she said, adding that implementing structural changes means “that you have to maybe not reshuffle the political elite, but you will have to sort of generate the new elite. You will have to rely more on private business from middle class”
http://www.neurope.eu/article/bottom-drops-out-russian-oil-barrel