Russia deficit unmoved by oil surge, analysts say

14/05/2009 | Phil Thornton

The recent surge in the oil price will deliver a much-needed boost to the Russian economy but will not be enough on its own to eliminate the country’s large budget deficit, economists have told Emerging Markets.

Crude prices have spiked by 16% over the last month, breaking through the $60 a barrel mark as rising optimism among investors about a global economy recovery has driven up commodity prices.

Russia is a key exporter of oil and gas and the energy sector makes up between 22% and 24% of its economy, according to Michael Ganske, chief emerging market economist at Commerzbank. “A price of $60 to $70 a barrel is quite supportive and would break even the current account,” he told Emerging Markets.

“It is not like the fantastic cash flow that we saw last year when prices went to $150, but it is supportive for the economy at a time when we expect a severe recession with GDP contracting 4.9% this year.”

He said Kazakhstan and Turkmenistan would benefit as net exporters although other countries would be hurt by higher energy costs. “But indirectly this will be supportive for the entire region because Russia is a major economy and if it stabilises sooner rather than later it will take pressure off other countries.”

The IMF expects Russia to contract by 6% this year while yesterday the Institute for International Finance warned GDP could shrink as much as 8.7%.

Natalia Orlova, a senior analyst at Alfa Bank in Moscow, said Russia was facing a fiscal deficit of R3 trillion ($93.7 billion) this year. A sustained oil price of $60 a barrel would reduce that by R1 trillion. “The oil price would have to go back to $90 a barrel for Russia to be in surplus,” she told Emerging Markets.

She warned increased revenues from oil exports would be offset by a decline in revenue from other areas. “You might see substantial declines in VAT because foreign VAT, which reflects tax collection from foreign trade, reflects the significant 40% decline in imports,” she said.

Analysts have been surprised by the rise in oil prices. Eugen Weinberg, a commodity analyst at Commerzbank in Frankfurt, said he had expected prices to reach $70 by year end.

“It has been too fast and furious,” he told Emerging Markets. “I think it is unjustified as it is mostly based on euphoria and optimism about the recovery in the world economy.” Wednesday’s unexpected 0.4% contraction in US retail sales in April triggered a 1.4% in oil prices to $58 a barrel. “This is about sentiment and people are looking for hard facts,” Weinberg said.

The IEA, which yesterday cut its annual global oil demand projections for 2009 by another 200,000 barrels, expects a decline in global oil demand of 2.6m barrels a day.

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