Sunday, January 25, 2015

Oil Prices Force Russia Into Evasive Action

Russia will have to rewrite its budget after oil prices have cost the government $21 billion in the last few months alone.

The budget redo is good news for investors worried that Russia might, in a worse case scenario, default on its debts. While that is out of the question, according to moderate Prime Minister Dmitry Medvedev, what is not out of the question is oil’s erosion of the Russian government’s checking account. And the general fragility of the Russian economy on account of weak oil prices. Nearly 70% of Russian export revenues are from oil and gas, according to the U.S. Energy Information Administration.
Medvedev’s first deputy, Igor Shuvalov, said the emergency budget will be based on current oil prices. The original 2015 federal budget was based on oil averaging $100 over the year. Oil (WTI) futures settled at $45.59 on Friday with Brent oil settling at $48.79.

“We are drawing up this plan considering the current oil price on the market,” Shuvalov said on the Russian TV show Vesti Saturday.

Last week, Medvedev said Russia’s anti-crisis measures are the country’s top priority. The new budget would require about 60 bills to be drafted, and a series of presidential decrees. He said part of the measures will include support for small businesses, as well as financial support for individual companies.

Russia’s economy is getting hit by weaker oil prices and sanctions imposed on it by Washington and Brussels. Investors were hoping that the European Union, at least, would end sanctions in July. But recent fighting in four Ukrainian provinces on the Russian border, and the cancellation of last week’s peace conference in Kazakhstan, has the E.U. mum on sanctions now.
Alexei Kudrin, Russia’s former Finance Minister, told attendees of the World Economic Forum in Davos last week that sanctions could go on for another two to three years.

Russia’s third quarter GDP rose just 0.4%, and is expected to turn negative in the fourth quarter. This year will be a tough slog for Russia, even if the government rewrites its budget. GDP is expected to decrease by 5% this year, Moody’s Investors Service said on Jan. 15.

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