Oil outlook clouds Russia’s economic future

The era of record profits from oil and gas is over – that's according to Russia's Finance Minister Alexey Kudrin. 2008 is likely to be the year of peak oil and gas production in the country.

The big oil companies are cutting investment in new projects. Russia has received up to $1 Billion a day in oil revenues in recent years, and the country's budget and economy remain highly dependent on hydrocarbon earnings.

The world financial crisis and recession has triggered big falls in the world's oil price. That will significantly affect the Russian budget, according to Mikhail Kroutikhin, partner at Rusenergy.

“We will see a deficit after the price goes down to 70 dollars, at least that s what the Finance Minister says. I believe it could be sooner.”

At the beginning of the week oil dropped to an 8 month low, and rebounded slightly on Tuesday to $89 a barrel for Russia’s Urals blend. 

As the worlds second largest oil exporter, Russia is critically dependent on international consumers. President of the Russian Oil and Gas Industrialists Union, Gennady Shmal, says the oil giants have also looked abroad to borrow.

“A lot of our oil companies have high dependence on foreign borrowings. We don't have a common figure but for example Gazprom has around $40 Billion and Rosneft is also around $40 Billion. And Russia exports a lot, so we depend on our international consumers of oil and gas.”

The first signs of falling consumption from US and China – the world's largest oil consumer – could see the price of oil down to 60 $ per barrel, analysts say. That could trigger a vicious circle of falling income and investment, as production gets more expensive in Russia's ageing fields.