The sensitivity of Russian government finances and that of the broader Russian economy to oil prices has diminished, but they still remain vulnerable to a sustained oil market weakness, according to a March 14 S&P Global Ratings report.
The analysts wrote that oil prices have historically been a major driver of Russia's business cycle, noting exports of crude oil and oil products accounted for 46% of goods exported from the country in 2018, while natural gas exports accounted for another 12% to comprise a total of about 16% of Russian GDP.
The analysts wrote that past Russian efforts to use windfall oil revenues to pay down debt and build up assets in oil funds "were an important factor behind our upgrade of the Russian sovereign to investment grade in early 2005 — only four years after [the] country had emerged from a sovereign default. However, previous fiscal frameworks did not succeed in avoiding procyclical fiscal policies and insulating the economy from oil price swings."
The government's current fiscal framework targets a primary budget deficit of 0.5% of GDP, calculated at a benchmark oil price of US$40 per barrel in 2017 dollars, which increases 2% each year. The government uses windfall revenue above the benchmark oil price to purchase foreign exchange for accumulation in the state's National Welfare Fund.
"Russia is more resilient to external shocks than three to four years ago: The economy's net external asset position is large, the ruble exchange rate is floating, and the government's balance sheet is strong," the analysts wrote, noting that S&P Global Ratings increased Russia's sovereign debt to BBB- in February 2018. "Although the existing economic policy framework should allow Russia to absorb future term-of-trade shocks, a fall in oil prices for an extended period below $40 a barrel will likely lead to a sizeable depreciation in exchange rates, a spike in inflation, and weaker business confidence, which will weigh on growth and public finances. If not addressed by an adequate policy response, which would most likely imply additional fiscal adjustment, this will likely pressure sovereign creditworthiness."
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