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OPEC Decision to Cause Oil Shock for Russia.

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OPEC Decision to Cause Oil Shock for Russia
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The OPEC refusal to decrease oil production and a subsequent price fall to a 4-year low make the future of Russian economy tenuous.

Since July 2014, the Russian ruble depreciated to the U.S. dollar by 45%, and the economic growth stalled. Falling oil prices together with western sanctions induce Russian experts to seek alternative sources to fill the budget. The situation has also provided fertile ground for speculation as to the motives.

Just three months ago, a barrel of Brent oil was more than $100. Now the price is $72.46 with a negative forecast. The oil expert Amir Khanjani asserts that with a current rate of oil production (30 million barrels a day) there is a 2 million barrel surplus. At the same time, the Gulf countries are not ready to reduce production. Speculation is mounting that the they fear that American shale gas companies will take their market share. If the price stays at the level of $70, shale gas extraction in the United States will become detrimental.

A $70 price is incompatible with the sustainable development of the Russian economy. Historically the graphs of Brent oil price and the Russian economy growth rate have shown significant similarity. When the price falls, the growth slows down as well.

OPEC Decision to Cause Oil Shock for Russia
May 1987 – February months average Brent spot prices.

Budget Cuts

On October 4, Russian Finance Minister Anton Siluanov admitted that the 2015 state budget was planned with a $100 price in mind. He promised that the Russian government would keep its commitments to the society even if the price continues to fall, and $70 billion of national reserves would be used to cover the budget deficit. Despite the minister’s promise, just yesterday his subordinate and Head of the Long-term Strategic Planning Department Maksim Oreshkin proposed budget cuts as a method of financial adaptation. Previously, the Bank of Russia expected a zero economic growth in 2015, but now the tide may turn downcast.

OPEC Decision to Cause Oil Shock for Russia
Russian GDP Annual Growth Rate. (1995 – Present)

Optimistic

CEOs of Russian oil companies seem to be more optimistic. Rosneft President Igor Sechin announced that a $60 price is acceptable, because a barrel cost value is only $4. One may find hypocrisy in Sechin’s words. Recently he demanded $42.5 billion from the Russian National Welfare Fund as a compensation for economic damage, inflicted by the western sanctions against Rosneft. If not Sechin’s intervention, part of the money would be allocated to the Tyumen region to finance road reconstruction. Lukoil Vice-President Leonid Fedun claimed that even with a $25 price the corporation would remain profitable. At the same time, offshore drilling, Arctic drilling, and shale gas extraction would become detrimental, Fedun says.

Speculation

Some of the Russian experts saw the fall of ruble and oil price as a part of well-planned anti-Russian campaign, directed from Washington. Professor of Russian Academy of Science Oleg Sukharev believes that the United States is using the same methods to topple the Russian economy as it used against the Soviet Union. In 1980s, the U.S. allegedly destabilized the Middle East and caused a quadruple oil price fall. As the Soviet Union was dragged into the War in Afghanistan and seriously dependent on mineral exports, its budget collapsed. Historian and writer Andrei Parshev supposes that the U.S. is pressing on the Gulf monarchies to manipulate the oil price and make it loss making for Russia.

This speculation has a visible weaknesses however – it interprets the facts very selectively, and ignores the alternative explanations. First, it is not in the best U.S. interest to decrease the oil price so rapidly, because it may crush its well-established fracking industry. Second, high oil price should not be taken for granted and used for budget planning. The price decrease may be an objective and irreversible process, because oil burning is becoming obsolete before the new sources of energy. Brazil increases bioethanol production, American electro-mobile pioneer “Tesla” advances on the car market, Denmark is planning to get half of its energy from wind generators, and the solar panels are becoming cheaper and much more efficient. When the energy market becomes so diverse, reliance on hydrocarbon exports is not the best economic strategy for the 21st century.

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Alexey Ilin
Alexey Ilin, BA in International Relations (Altai State University, 2012), MA in International Affairs (Texas A&M University, 2015). Fulbright scholar in 2013-2015. Currently works as a staff intern with the Kennan Institute of Wilson Center. Areas of interest include international security, grand strategy, Russia-U.S relations, the Middle East, and international law. Publishedin New Eastern Europe, Circus Bazaar, The Conversation and The Washington Post.