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Low Oil Price Instigating another ‘Russian Flu’?

In 1998 plummeting oil prices led to the Russian government devaluing the Russian ruble causing a financial crisis for the country, however the following year the oil price picked up to help stabilise the economy. Now, 17 years after the ‘Russian Flu’, the lowly oil price is again causing trouble for the ruble.

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January’s a tough month, but spare a thought – if you’re feeling charitable – for Putin who just ‘had his Christmas stolen’ by the oil collapse. A bad start and one that’s compounded when you consider that Moscow had based its budget for the year ahead on an average of $50pb. Russian traders had only just finished adjusting their belts, bellies swollen after feasting on goose cooked in a sour cream sauce and kozulyas, when the market plunged to a 12 year low – with prices of $34pb. BCS brokerage put it best. The MICEX on Monday was a “horrible awakening.”

Everyone is feeling the pinch. As Reuters reports, “Civil servants’ salaries will be frozen for the third year, pensions are to rise less than inflation, foreign goods and vacations will become even more expensive.” One Moscow journalist told the agency, “It feels like the 1998 crisis all over again. My salary’s value in dollars as more than halved. I now earn less than I did in 1997.”

Those with money are watching carefully. There was hope that investors would return, having left when the ruble collapsed. On the back of those reports, the government predicted economic growth of 0.7% and 1.9% this year and the next. They might bide their time now.

Optimism is becoming a sought-after commodity. David Hauner from Bank of America Merrill Lynch said, “As long as oil keeps falling, Russia will keep falling. We do need to acknowledge that if the market gets disorderly, everything could change quickly and the ice is getting somewhat thin now.” The government – with an eye on 2018 elections – is preparing for the worst. New Europe reports, “Finance Minister Anton Siluanov indicated last month that if the oil price drops below $30pb they will make cuts. Russia is running a budget deficit of 3% of GDP this year and since President Vladimir Putin has ordered it to be kept below that level, the government will have to let the ruble depreciate further to balance the budget.”

American commentator Brian Whitmore said this is the fruit of Putin’s actions in 2014. “If that was the year Russia went rogue, 2015 was the year when the cost of that course became manifest for Russians. And next year should be when we learn whether Vladimir Putin’s regime will be able to bear those costs.”

Ongoing concerns over China’s economy continue to rattle investors, dampening any hope for a surge in demand to tackle the supply glut. Russia relies on oil exports but needs $100pb. It is however part of the pricing problem. It’s been pumping oil at a post-Soviet record of more than 10.8 million barrels per day thanks to newly launched fields and by cranking up output of gas condensate. But if this continues – things will change. Deputy Finance Minister Maxim Oreshkin told the TASS news agency, “The current oil prices may lead to quite hard and fast closures of certain oil producers in coming months.”

Putin’s spin officers are earning their keep. He told the German Bild newspaper that the plunge was hurting the country but would have a positive impact – pushing Russia to improve its financial policies. “Our non-oil and gas deficit had risen to a very dangerous level. Resisting the spend of oil funds is difficult but it is the reduction of these expenses that improves the economy. We believe we will gradually be looking at the stabilization and rise of the economy.”

Whether or not that New Year’s Resolution is achievable remains to be seen. Craig Erlam at OANDA said,  It seems that oil in the low 20’s, which would have been unthinkable a couple of years ago, is now a real possibility.” If that happens, all bets are off the table.