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Central Bank of Russia does not rule out another pandemic wave & $25 oil price

Central Bank of Russia does not rule out another pandemic wave & $25 oil price
Assessing risks for the Russian economy, the country’s financial regulator warned that a new wave of Covid-19 may result in lower oil prices and a deeper economic contraction.

The Central Bank of Russia presented a report earlier this week outlining four basic scenarios for Russia’s economic development in the next three years.  

In the worst-case or “risk” scenario, Russia’s gross domestic product (GDP) may fall up to 5.5 percent this year and the economy will start to slowly recover in 2021. This prognosis implies that the resurgence of the deadly virus around the globe will coincide with other shocks for the global economy, such as escalation of trade rows and geopolitical tensions, as well as debt problems in some countries and sectors.

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If this turns out to be the case, the efforts of key oil producers, known as the OPEC+ group, to boost the energy market might be futile, the analysis shows. According to the regulator, the price for Russia’s Urals oil brand could plunge to $25 per barrel next year and will grow to $35 per barrel only by 2023.

Other possible scenarios – base-case, deflation, pro-inflation – do not imply such a steep drop in oil prices, keeping the commodity at a $35-per-barrel minimum. If the coronavirus outbreak is contained and the restrictions are lifted as expected in the base-case outlook, global economic recovery will be slow until the end of the projected period and oil prices are expected to stabilize at $50 per barrel by the end of 2022. Meanwhile, the Russian economy is set to partly recoup losses and reach its potential level of output in two years.

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The pro-inflation prognosis implies that despite declining epidemic risks, the fall in global output would be greater. In this case, crude prices will still remain suppressed at $42-43 per barrel in 2023.

According to a deflation outlook, the measures to contain the coronavirus will be in place for a long time, preventing fast economic recovery. In this event, the Russian Central Bank expects that major global oil producers will have to further prolong output caps, and crude prices will remain at the $35 level in 2022 and will get to $50 per barrel no earlier than in three years.

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