Deutsche Bank on Russian 'Break-Even' Oil Prices

And as you've probably already guessed, they're wrong

Wed, Jul 22, 2015
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Russia's 'break-even' price around 20% lower than Western projections

This article originally appeared at The True Economics


An interesting chart from Deutsche Bank Research putting break-even (fiscal budget) figures on oil prices for major oil producers:

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Which puts the Russian break-even price at USD 105 per barrel.

The reality is somewhat different. Russia has the capacity to increase oil output further and has done so already (note that it is now world's largest oil producer). It can also raise some other exports volumes, though general global conditions are not exactly supportive of this, and this underpins the revenue side of the budgetary balance somewhat.

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Meanwhile, the Russian government's own budgetary estimates put the break-even price of crude at around USD 80-85 per barrel, not USD 105 per barrel, which puts it closer to the UAE than to Oman.

Also, the Russian budget is listed in rubles, not USD. This means that the FX valuation of the Ruble to a basket of currencies (Russian exports are not all priced in USD) co-determines the break-even price. Moderating (albeit still very high) inflation and EUR trend, compared to USD trend, suggest a falling 'fiscal break-even' price of oil for Russia.

There are too many variables to attempt to estimate an effective and accurate 'break-even' price for oil for Russia.

What is clear however is that Russia's current account (external balance) is in the black and is improving, not deteriorating. The latest balance of payments data show a current account surplus of almost USD 20 billion in 2Q15. The June 2015 y/y current account surplus is at 4% of GDP. The driver here is a decline in imports (down 40% in dollar terms in 2Q15 y/y) outpacing a drop in exports (down just under 30% y/y). In the first half of 2015 the trade surplus was USD 70 billion (USD 210 billion in exports, USD 140 billion in imports).

The balance of payments is also being supported on the upside by a decline in capital outflows. 2Q15 capital outflows amounted to ca USD 20 billion, predominantly comprising bank repayments of maturing foreign debt (which improves bank balance sheets and deleverages the economy). Moreover, direct investment from abroad into Russian non-fianncial corporations rose over 2Q15, resulting in an increase in foreign debt held by the non-financial sector.

Overall, the Russian Central Bank shows a foreign debt position at ca USD 560 billion (or 30% of GDP) at the end of 2Q15 - basically unchanged from 1Q15 and down from USD 730 billion at the end of 2Q14.

And another reminder to fiscalistas:

  • Russian public (government) external debt currently stands at USD35 billion. 
  • State-controlled banks hold USD 90 billion in external debt (total banking sector external debt is USD 150 billion and 60% of that is held by state-owned banks).
  • State-controlled NFC firms hold ca 40% of USD 360 billion foreign debt written against Russian NFCs (USD 144 billion). 
  • Accounting for cross-holdings and direct equity-linked debt, net foreign debt that has to be repaid at maturity or refinanced by NFCs and Banks owned by the Russian Government is probably around USD 150-160 billion. 

Sizeable, but less than 12% of GDP even after including the official public debt and state-owned enterprises debts.

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