Russia to revise budget spending after OPEC meeting

The dollar and the euro hit new records on the Moscow Exchange. The US dollar has neared the level of 50 rubles per dollar, whereas the euro is now traded near 62 rubles per one euro. The fall of the ruble is connected with the collapse of world oil prices after OPEC cartel decided to preserve current oil production quotas - 30 million barrels a day.

As of 10:05 MSK, weighted average US dollar went 2.04 rubles up to $49.5298 rubles per one dollar. 

The average rate of the euro gained 2.09 rubles against the official rate set by the Bank of Russia for today, Nov. 28 and made up 61.7097 rubles.

OPEC's decision not to reduce quotas for the extraction of hydrocarbons will stay in effect before June 2015. Most likely, the price for a barrel of oil will not grow during this time. 

OPEC presumed that against the backdrop of current prices of oil, they will be able to displace cheap US shale projects from the market. At a price below $70 per barrel, about a half of these projects will be gone within six months.

Speculators, anticipating a possible reduction in oil prices, immediately rushed to the currency market. If oil prices fall below $70 per barrel, the Central Bank of the Russian Federation will have to give serious attention to the support of the national currency.

Officials with the Finance Ministry of Russia said after OPEC's decision that Russia would have to revise its budget guidelines to consider the price of 80 dollars a moderately optimistic, rather than a pessimistic forecast.

Expenditures of the Russian budget for 2015 were calculated on the basis of the price of 96 dollars per barrel. The commission to optimize budget expenditures currently calculates the possibility of reducing expenditure in 2015 by ten percent.

According to Finance Minister Anton Siluanov, the Reserve Fund may have to provide 500 billion rubles from the available 3.9 trillion. Prior to this, the ministry intends to deal with the bailout reserve, which will amount to 120 billion rubles next year.

However, most significant changes in Russia's fiscal policy may occur during the layout of the budget for 2016, the Kommersant wrote. According to the head of the department of the Finance Ministry for long-term planning, Maxim Oreshkin, the state treasury will have to adapt for the new level of oil prices, which means a tougher approach to spending.

Russia may lose up to $70 billion due to the reduction of export revenues against the backdrop of the average annual price of $80 per barrel. For the budget, the decline of average oil prices by 20 percent means a setback in oil and gas revenues by 2 trillion rubles, or 2.5% of GDP. The devaluation of the ruble can compensate these losses by about 30%, but given slower growth and higher inflation, budget losses may be higher.

Russian companies responded with restraint to the outcome of the OPEC meeting. Rosneft enjoys a solid position on the market, because the cost of production at the company is the lowest in the world - a bit more than four dollars per barrel, a company representative said. 

Vice-president of Lukoil, Leonid Fedun, anticipating OPEC's decision, stated that the company would be able to deal with oil prices on the level of $25 per barrel. However, the majority of Russian companies will be forced to curtail some of their  projects with the price of $80 per barrel. 

Vitaly Bushuyev, the Director of the Institute of Energy Strategy, said in an interview with Pravda.Ru that Russia can not do anything about the situation, because the country is not an active player, but only a consumer. Russia will have to adjust itself to the situation.

"Russia can not affect the situation on the world market. The devaluation of the ruble is a response to falling oil prices, and in fact, oil revenues in rubles have remained the same. When they say that we are losing 100 billion from the budget - this is nothing but intimidation. Living standards of the population will not worsen. Social programs will not be revised, because we receive budget revenue in rubles. The inflation rate will eat some supplement, but this is the way inflation works."

According to the expert, oil prices will recover to $90 in 2016. "It will recover in the first half of 2015 to $100 per barrel to drop a little again afterwards, and the average price for 2015 year will be no higher than $95 per barrel,"concluded the expert.


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Author`s name Dmitry Sudakov