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17 Oct, 2008 04:28

Russian Duma holds budget hearing as oil slide threatens funding basis

Russia’s federal budget for 2009 could go into deficit as the price of Urals crude falls below $70/BBL, sharply cutting revenues of the world largest energy exporter. The drop comes as the State Duma is holding a second hearing on the Federal budget for

$70/BBL is the minimum price to sustain the current Russian budget spending plans. According to the draft budget, revenue next year will total over $415 Billion while spending will be no more than $343 Billion. 

Just a day before the budget hearing, a barrel of Urals was trading at just over $68/BBL on Thursday – below that $70 threshold. Oil has fallen 50% from its peak in July, and Russian oil exporters’ profits have dropped 70%.

But the Ministry of Finance is not revising its budget yet, and Vladimir Osakovsky, Chief Economist at Unicredit Aton, believes the situation is not dire.

“Even if oil prices fall would indeed fall below, the Russian budget has a security cushion against further declines in the form of the reserve fund.  So the even though the implied level of oil prices is not that realistic at the moment, the budget has resources to finance their spending from the reserve fund, so therefore the budget is not that unrealistic.”

Analysts say in the near future the price may fall as low as $40/BBL, bringing a weaker Ruble, high inflation and slowing GDP growth. But the state could even benefit from falling commodities prices according to Ron Smith, Head of research at Alfa Bank.

“It’s a great time to rolled out the infrastructure projects. Now with steel demand dropping, with companies cutting back production, with cement demand dropping, the government could step in and say OK now its time to go ahead and start accelerating these projects and pick up a lot of that slack demand and keep the overall economy running while doing something that’s very much needed, which is improving infrastructure.”

Russia will continue watching nervously, at least until the next OPEC meeting in November when the cartel is likely to cut production to hold up prices.