Russia starts to feel the pain of $30 oil

Russia should consider selling state banking assets as plunging oil prices continue to batter the recession-hit country's government budget, Russian Economy Minister Alexei Ulyukayev said on Wednesday.

Speaking to an audience at the Gaidar economic forum in Moscow, the minister said Russian authorities should consider the idea of cutting the state's holdings in the country's two largest banks, Sberbank and VTB, Reuters reported on Wednesday.

The state should consider this, he said, as there was a risk that low oil prices may remain for a prolonged period of time, possibly "for decades."


Tourists explore Red Square in front of St. Basil's Cathedral in Moscow.
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Tourists explore Red Square in front of St. Basil's Cathedral in Moscow.

That Russia could consider selling stakes in some of the country's largest lenders – it owns a majority 60.9 percent stake in the second-largest Russian banking group VTB and holds 50 percent of the share capital plus one voting share in Russia's largest lender Sberbank – reflects the tough times the country finds itself in.

Russia entered recession in 2015, an event that followed the dramatic decline in oil prices (Russia is a major oil producer) as well as international sanctions imposed on it for its annexation of Crimea in March 2014 and role in the pro-Russian uprising in Ukraine in the same year.

When contacted by CNBC, Sberbank declined to comment on the remarks but highlighted comments made by the bank's chief executive in an interview with Handelsblatt newspaper in November in which he signaled a tacit approval of a privatization plan, saying it would "greatly improve our situation." VTB had yet to issue any comment to CNBC but said it was preparing a statement.

Progressing privatizations

Chris Weafer, senior partner at Macro-Advisory, told CNBC that the economy minister's comments added weight to speculation that privatization of state assets is on the horizon.

"It's something that we know President Putin is generally in favor of...but the bureaucrats sitting at the top of big state companies effectively thwarted plans to sell," Weafer told CNBC Europe's "Squawk Box" on Wednesday.

"But now there's a greater need to raise money for the budget because of the oil price decline, the momentum or influence is hopefully now shifting towards to the people saying 'we need the money' and that might make a difference in terms of progressing privatizations," he said.

Also speaking at the Gaidar event on Wednesday, Russian Finance Minster Anton Siluanov warned that oil prices would stay low for longer, Reuters reported . He said that the state budget deficit was around 2.6 percent of gross domestic product in 2015 and that he would review the budget due to low oil prices.

The budget was balanced at $82 a barrel, he said, a far cry from current levels with Brent and U.S. WTI crude trading around the $30 mark. Against such a backdrop, Siluanov said he would propose a 10 percent cut to budget spending.

According to Olya Khvostunova, a Russian journalist tweeting extracts of Siluanov's speech, the finance minister also said that the government expects to raise money through the privatization of state property.

Russia is not the only country having to find ways to mitigate the price of oil's effect on the government budget. Six Gulf oil-producing countries (Saudi Arabia, Kuwait, Bahrain, Oman, Qatar and the United Arab Emirates) are planning on introducing a sales tax for the first time amid the drop in prices.

Saudi Arabia, the de facto leader of oil producing group OPEC, has been largely blamed for the continued fall in oil prices given the group's decision not to cut production amid a glut in supply – a move that would have helped to support prices – as part of a strategy to pressure non-OPEC rivals.

As oil prices threatened to fall through the psychologically-important $30 a barrel mark on Tuesday, there were reports that OPEC could be about to hold an emergency meeting as some members request a change of strategy. The UAE, an OPEC member, quashed rumors of a meeting however, signaling that there would be no change to the group's record oil output.

Major oil companies have been announcing cutbacks on drilling projects and staffing, the latest announcement being from BP on Tuesday, which announced that it was slashing more than 4,000 jobs amid a $2.5 billion restructuring program.

The consequences of lower oil prices have extended beyond oil producers, however. On Wednesday, the head of Sodexo, a company providing facilities management to the oil and gas sector, said it had seen the demand for its services drop "dramatically."

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