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28 Mar, 2020 14:55

6 years of economic war toughened Russia to deal with oil market chaos

6 years of economic war toughened Russia to deal with oil market chaos

Russia has learned to survive Western sanctions and managed to accumulate enough funds to keep its economy afloat for several years even if oil prices continue to decline.

In a recent report, rating agency Moody’s said the Russian economy is less vulnerable to oil market shocks triggered by the coronavirus outbreak and the row between Moscow and Riyadh.

“Russia is best-prepared of all the oil-producing countries, as our economy has been living in an economic war mode for 6 years,” the president of the Russian-Asian Union of Industrialists and Entrepreneurs, Vitaly Mankevich, told RT.

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Analysts say that flexible exchange rates allow Russian oil companies, which enjoy relatively low production costs (around $15-20 per barrel), to offset the decline in revenue. While analysts believe crude prices are unlikely to break that low threshold, they say that a drop below $40 per barrel is already bad for the Russian economy, while $30 is even worse.

“It will be a disaster [for the Russian economy] if oil companies become unfeasible, that is, when oil prices drop lower than 15 dollars per barrel,” Sergey Suverov, chief analyst with Premier BCS, said in an interview with RT.

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While Russia’s budget spending has not eclipsed revenues since 2017, the fall in oil prices and the fallout of the pandemic will result in a budget deficit of up to two percent or even more if the situation deteriorates, according to Mankevich. Russia’s fiscal breakeven oil price (at which the country can balance the budget) is $42.5 per barrel, but the gap can be filled thanks to its reserves.

Russia’s sovereign wealth fund can support the economy for two to four years depending on the situation, analysts believe. Gold and foreign currency reserves, which currently exceed $580 billion, can hold even longer, according to Mankevich. However, he warned that the holdings can almost be cut in half to $300 billion if there are two or three years of low oil prices.

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