Russian oil companies, state budget more resilient to oil price volatility than in 2016

As OPEC+ mulls its response to the oil market impact of the coronavirus outbreak, analysts see Russian oil companies and the state budget as more resilient to oil price volatility than they were in 2016 when the group first agreed on coordinated crude production cuts.

Although Russian oil analysts expect the severity of the coronavirus situation is likely to drive Russia to agree to some extension of the OPEC+ agreement this week, they see Russia's increased resilience to price fluctuations as here to stay.

This is largely due to the fiscal rule introduced in 2017, which reduces revenue volatility and softens the impact of oil price fluctuations and to some extent incentivizes maximizing crude production.

"With the price of oil staying above $40/b (plus 2% annual indexation), it doesn't matter if it's $60/b or $80/b: the channeling of excess revenue due to higher oil prices into the National Welfare Fund means that the ruble won't surge against the dollar/euro and the inflation rate will be on-target," George Voloshin, head of the Paris branch of Aperio Intelligence, said.

"On the downside, if the price of oil falls below $40/b, the government will use the NWF for stabilization purposes by selling US dollars for rubles and thus preventing the ruble from weakening," he added.

Greater revenue stability

This decoupling of the ruble-dollar exchange rate from the oil price has significantly reduced revenue uncertainty, with the current weaker ruble a positive for oil producers.

"Your typical ruble strengthening amid rallies in oil prices is not happening, the ruble has decoupled from the oil price. So the ruble is kept permanently weak which is good for exporters like oil companies," one Moscow-based analyst said.

"We are definitely in better shape than we were in 2016, there's no question about it. Russia could probably survive oil prices at $30/b for a couple of years," he added, although this would be tough for the economy to take, with no increase in GDP, social spending or real incomes for the population.

Voloshin added: "Overall, the greater predictability of ruble exchange rate volatility and oil-linked inflation is a good thing for exporters with significant international operations, energy exporters being first among them."

Budget impact

The fiscal rule is also a positive for the Russian economy, which remains structurally dependent on oil.

Russian President Vladimir Putin said on Sunday that Russia is comfortable with current oil prices and took a Brent crude price of $42.40/b as its base level in its 2020 macroeconomic policy.

He said that Russia's international reserves are $563 billion and there is a further $124 billion in the National Welfare Fund, which is sufficient to ensure stability and meet all budget obligations, even with a possible deterioration in the global economy.

Nevertheless Putin called for continued cooperation through OPEC+ and ordered ministers and oil companies to prepare to respond to various scenarios resulting from the coronavirus outbreak.

While concerns over the impact of that on oil prices and demand may determine Russian oil production policy in the short-term, the fiscal rule is likely to be a more permanent fixture.

"To the extent that the government sticks to the fiscal rule by maintaining the cut-off point and ring-fencing excess revenue within the NWF, in times of higher prices, and by stabilizing the ruble through the NWF (and, if required, central bank interventions), in times of lower prices, the correlation will continue to be weaker than pre-2017," Voloshin said.

There may be some amendments however, with analysts seeing some possibility that the threshold will be increased above $40/b.