Are Oil Exports Russia's Curse as Well as Its Blessing?

As participants gather in the Russian city of St. Petersburg for the St. Petersburg International Economic Forum, their debates will focus on minimizing the effects of the debt crisis that is still raging through the euro zone.

However, Russia itself is more sheltered from the crisis this time than it was during the global downturn in 2008 and 2009. Its prospects are brighter than those of many other economies, despite fears that the return of Vladimir Putin to the presidency will slow the pace of structural reforms and falling oil prices could hurt the country's budget.

Vladamir Putin
Bulent Kilic | AFP | Getty Images
Vladamir Putin

"I think currently Russia is in a very good situation," Anton Struchenevsky, senior economist at Troika Dialog in Moscow, told "The exchange rate policy is more flexible than in 2008/2009, and it helps Russia to absorb external shocks."

The ruble fell 12 percent against the dollar in May, the biggest drop since January 2009, but in June it recouped most of the losses and is nearly flat year-to-date.

"Having lurched given the crisis in the euro zone, [the ruble] has pretty much recovered all its losses," Liam Halligan, chief economist at Prosperity Capital RF in Moscow, told

"The Russian state has a very strong balance sheet," Halligan added, pointing out that Russia "hasn't printed any money."

Half of the revenues to Russia's budget come from the oil and gas sector, and taxation in that area depends heavily on the oil price on international markets. When prices decline, the Russian budget gets less revenue in dollar terms. But the budget is denominated in rubles, so a decline in the national currency helps to offset falls in oil prices to a certain degree.

Oil prices fell to around $83 a barrel from around $110 in February because of worries that the global economy would slow down as the euro zone debt crisis spread.

"Due to the devaluation of the ruble, the fall in oil prices was somewhat compensated," Struchenevsky said.

Growth Forecast Upgraded

The World Bank has upgraded slightly its economic growth estimate for Russia, forecasting growth of 3.8 percent in 2012 and 4.2 percent in 2013 in its June edition of the Global Economic Prospects. In January, the estimates were 3.5 percent for this year and 3.9 percent for next year.

Russia's macroeconomic data would make many euro zone politicians go green with envy. The country's economy grew by 4.3 percent last year, its sovereign debt is around 10 percent of gross domestic product, its budget had a deficit of 0.9 percent in the first three months of this year and its current account had a surplus last year.

"Actually, Russia is crediting the rest of the world," said Struchenevsky.

One of the biggest risks for Russia's economy is the fact that it has become too dependent on high oil prices, said Neil Shearing, chief emerging markets economist at Capital Economics.

In 2007, according to Capital Economics' calculations, Russia needed the oil price on international markets to be around $40 per barrel to balance its budget — that is, for the state's revenue to match expenditure.

However, because of a big fiscal stimulus in 2008-2009 and increasing government spending on welfare, pensions and public sector salaries, it now needs an oil price of around $120 a barrel to incur no budget deficit, Shearing said.

"If oil prices continue to fall, the economy is likely to suffer," he said. "They can cope with oil prices being a bit lower for a while, but that could quickly wrap up I think."

Russia's Finance Minister Anton Siluanov said in an interview with the Financial Times that the country had earmarked around $40 billion for this year and the next to shore up the economy in case the euro debt crisis spreads. Part of it could be spent on making up for any shortfall to the budget should oil prices stay below $117 a barrel.

Halligan pointed out that oil prices are still high, despite the fears about the global slowdown, as the oil market is tighter, with supply issues at the fore.

"Year to date, the oil price is actually higher than the annual average in 2011, which was the highest ever," Halligan said.

Struchenevsky said Russia's flexible exchange rate policy — with the ruble nearly floating freely — would help it cope with lower oil prices and would not trigger major fiscal imbalances.

"Even if the oil price goes down to $80 a barrel, the [budget] deficit would not exceed 3 percent of gross domestic product," he said.

Oil and Gas

For investors, "oil and gas look very interesting," said Alexander Branis, director at Prosperity Capital Management RF, who pointed out that valuations in the sector are low and companies have cash.

Gazprom, TNK-BP and Bashneft — which operates 140 oil and natural gas fields in Russia and has three refineries in the southern Republic of Bashkortostan — are stocks that Branis likes. (See disclosure below.)

The retail sector, where small players have small shares of the market and are looking to consolidate, is also attractive, Branis added.

Critics have said that since Putin became president again in March, the pace of reforms has slowed down and this has spooked some foreign investors.

In May, Russian stocks plunged after a Kremlin decree designated power grids FSK and MRSK, as well as hydroelectric company Rushydro, as strategic companies in which majority stakes must stay in state hands, effectively canceling privatization plans for the energy sector.

"Putin has always been the more hawkish in terms of promoting state capitalism," Shearing said, pointing out that when it comes to privatization plans in Russia "there's always been this dichotomy between the rhetoric and the reality."

However, Shearing added, the current market conditions are not the best for selling state assets.

The privatization issue is not dead, according to Branis. He says Putin wants to sell some state assets, too, but over a longer timeframe than Prime Minister Dmitry Medvedev.

"I think in the next few months we'll see a lot of discussion about it. I think there will be a compromise. Some transactions will take place in the energy sector but probably not this year, more likely in 2013," he added.

The benefits of privatization will not just come from the cash the state would get for the stakes but also because putting the companies in private hands would cut corruption and bring about structural reform.

"I hope the government will look more towards the benefits of the privatization rather than the price," Branis said.


Alexander Branis and Prosperity Capital Management RF own the following stocks mentioned in the story: Gazprom, TNK-BP and Bashneft.