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4 Sep, 2008 02:23

Fall in crude prices has long term upside for Russian economy

Crude prices have fallen for a fourth day – as oil companies discovered that Hurricane Gustav had caused minimal damage to platforms in the Gulf of Mexico. Crude fell another dollar, to around $108 a barrel – with investors focusing

Russia's stock market often falls in line with the oil price. It seems it's no different this time. Oil is down about 25% from its peak above $147 earlier this year. And Russia's stock market is down a similar amount – at the lowest for two years.  It's not just oil. A range of commodities that Russia exports, from Steel to precious metals, have also fallen in price.  But the black stuff is key, and Erik Depoy, equity strategist at Alfa bank thinks it isn’t likely to fall much further from here.

“OPEC which meets on September 9th in Vienna, is very likely to signal to the oil market that they are ready to defend a level of oil at $100 a barrel.”

Looking at the numbers – analysts say even if oil fell to between $60 and $80 a barrel, Russia's economy would thrive, though investors could take fright. That could be damaging – because despite eight years of growth, Russia's economy is still heavily dependent on the energy sector and Vadim Pogneshekov, Portfolio Manager at UFG Asset Management, notes that investor sentiment about Russia has recently come under pressure from a range of issues.

“The stockmarket fall is caused by a number of global and domestic problems, such as the commodities market slump, both negative for Russian and international companies, The situation with the Mechel company, the military conflict between Georgia and South Ossetia, and the general oil price decrease.”  

The irony is that an oil price around current levels could concentrate the minds of politicians on the need to diversify Russia's economy, and Erik Depoy believes the recent fall in crude prices will bring about a focus on Russia’s long term interests.

“The threat is when the oil price is so high, the budget revenues are so high, that the legislators get complacent , and they forget the long term interest, which is to really diversify the economy and to guard against the potential, for the day when oil is not above 100.”

Investment bank JP Morgan this week said Russia's economy is booming, despite inflation pressures and the Georgia crisis. But it expects the drivers of growth to shift – from exports and consumption – to investment, state spending and infrastructure.