Russian and foreign experts give their opinions about whether or not a recent drop in oil prices will be precarious for Russia’s weakening economy.

How long will Russia's economy be able to keep afloat if oil prices keep dropping? Photo: AP

After Saudi Arabia, one of the world’s biggest oil exporters responsible for determining the price of oil worldwide, announced that it would give a big discount to its Asian customers, there was an immediate decline in oil prices. Of course, basic supply and demand  lower oil consumption and higher oil production (and, particularly, Riyadh’s reluctance to decrease oil production)  played a role as well. Yet, with the upcoming OPEC Summit scheduled for late November, experts are concerned with the current policy unpredictability surrounding energy prices.

Until recently some Russian officials, and, particularly, Finance Minister Anton Siluanov, have assured markets that Saudi Arabia is not interested in rapidly declining oil prices, which are hardly likely to drop below $80-85 per barrel, even in a worst-case scenario. Likewise, Igor Sechin, head of Rosneft, Russia’s largest oil company, has been even more bullish, claiming that oil prices cannot plummet below $90 per barrel. On top of that, he believes that within the next five to seven years, oil prices might reach $150.

Yet the recent downward trend in oil prices – Brent crude prices have dropped 20 percent since mid-July, from $115 per barrel to about $90 – seems to have brought about more unpredictability.

Siluanov predicted that Russia’s budget would lack 500 billon rubles (nearly $12.5 billion) if oil prices drop to $87 per barrel and the dollar-ruble exchange rate trades as high as 40 in 2015. In such a scenario, Russia would have to use money from its Reserve Fund, which comprises about $90 billion, he announced at the Oct. 13 session of the State Duma, the lower chamber of the Russian parliament.

All of these recent developments have spurred the growth of numerous conspiracy theories among the Russian elites and led to a certain amount of consternation. They have also made Russian policymakers reassess their economic policy.

Surprisingly, Russia’s former Financial Minister Alexei Kudrin told Russian TV that he didn’t rule out that the U.S. and Saudi Arabia had teamed up against Russia to dump oil on the world markets. They could agree on an increase of oil production and, thus, its supply in the energy market, in order to lead to plummeting prices of black gold,” he said, as quoted by a number of Russian media. According to him, this trend might be maintained at a low level only during one year.

In contrast to Kudrin and those who agree with him, some Western experts are genuinely perplexed at the growth of conspiracy theories about oil prices and Saudi Arabia’s policy.  

“Actually, oil prices have been at an extraordinary high level in the last four years and it is not surprising that they should drop to a level closer to the historical norm,” Edward Chow, senior fellow of the Energy and National Security Program at the Center for Strategic and International Studies (CSIS), told Russia Direct. “Since 2011, we have experienced the highest annual prices in the entire history of the petroleum industry in both nominal and inflation-adjusted terms.”

Chow argues that even if oil prices fall to $80 per barrel, it would be a high price by historical standards and only mark a return to the level of 2010, before the big increase in price.

Meanwhile, some Russian experts argue that the headlong drop in oil prices amidst the increasing geopolitical risks in Eastern Europe and the Middle East brings about suspicions in the Kremlin for a reason.  

“The idea that somebody is dumping oil prices cannot help coming to one’s mind,” said Professor Yakov Mirkin, Head of the Department of International Capital Markets at the Russian Academy of Sciences’ Institute of World Economy and International Relations. “Whether it is true or not, we will never know.”

However, today commodity derivatives in New York, Chicago or London determine prices on energy resources. So, it is much more difficult to point fingers at the U.S. and Saudi Arabia and blame them for participating in a manipulation plot, Mirkin clarifies, implying that it is impossible to prove such a conspiracy despite numerous investigations into previous cases of alleged manipulations of oil prices during the Cold War.        

During the 1980s, oil prices had been steadily growing since the 1970s and reached their apex when the Soviet Union invaded Afghanistan, which led to deterioration in Moscow’s relations with the West.  

As prominent Russian economist Yegor Gaidar, the architect of the post-Soviet economic liberalization program, pointed out in his book “Collapse of an Empire,” Saudi Arabia saw the Soviet invasion in Afghanistan as a potential threat, which drove Riyadh to reassess its relations with the U.S. and, finally, bring them together. With the U.S. seeking low oil prices, Saudi Arabia tripled its oil production in 1985-1986, thereby inducing prices to plummet from $30 to $12 per barrel.

Chow argues that it is reckless to compare the 1980s drop in oil prices with the current situation.

“In 1985-1986 Saudi Arabia was at an extremely low production level and faced the prospect of having to cut production even more to prop up prices at the $30 level,” he said. “Today it is producing at a much higher level than in 1985-1986 and is signaling that it is unwilling to give up market share to sustain historically high prices, which are not in Saudi Arabia’s long term interests.”

Chow expects that this time the price drop to be “shallower” than the precipitous drop in the mid-1980s and, probably, shorter-lived.

Likewise, Mirkin is hesitant to compare the drop in 2014 oil prices with 1986 because it is too early to draw such parallels. 

“So far, there is no clarity that such a drop will be long-term or not,” he said. All this has been happening only during three months. In the 1980s it had been perennial for years.”

According to him, today’s Russia is more flexible economically and has much more room for maneuvering unlike the 1980s Soviet Union, because, currently, it can be seen as a market economy conditioned to function in global markets.     

“Roughly speaking, modern Russia – I hope – is a stronger and craftier creature that the Soviet Union’s machine was,” he sums up.

When asked how long Russia’s economy is able to keep afloat during a period of an oil price decline, Mirkin said that Russia is hardly likely to sustain financial instability for at least one year, regardless of probable recession and stagnation.

“This year Russia has seen a positive trade balance, which is 10 percent bigger than last year,” he said. “The currency reserves are likewise big, with a quarter of them (more than $100 billion) invested in U.S. state bonds.”

However, in the mid-term (two-four years), the oil price drop increases the risks of a crisis in Russia, which might have global implications and hamper chances of economic growth in Europe, Mirkin warns.

“Nevertheless, the economy has stared adjusting to rainy days and Russia’s final economic vector is unknown,” he clarified. “All this [sanctions, economic stagnation, weak ruble] may be expensive and unpleasant, but when money is decreasing, this helps the economy to be more effective sometimes.”

Meanwhile, Chow said that addiction to oil and gas has crowded out the growth potential in other sectors of economy. So, he looks at the challenge from the point of view of a half-full, half-empty perspective.

“Relatively lower prices offer Russia the opportunity to diversify its economy with more balanced policies,” he said.

According to Mirkin, a lot in Russia’s economic policy will depend on the duration of the downward trend in oil prices, whether it will go beyond one year.

“If we see a reverse [of the current trend], we will soon forget about fears and speculations,” Mirkin said.

As he points out, the importers of energy resources will obviously benefit from a long-term drop in oil prices, and particularly, Eastern Europe and Ukraine, which are desperately negotiating with Russia over oil prices. Likewise, among the winners may be China, Germany and even the U.S., which is still seen as a net energy importer. Yet, geopolitically, both Moscow and Washington might benefit, according to Mirkin.

“Such a drop in oil prices decreases finance and resources for radical Islamic movements in Russia,” he argues.

However, in the mid-term perspective, the benefits from the oil prices drop are not so obvious because it may bring about instability in exporters of energy resources, including in Russia, Venezuela, Nigeria, Iran, and other Middle Eastern countries, which might spur economic maelstroms in the world economy, Mirkin warns. 

“The map of global finances based on high oil prices might be redrawn,” he predicts. “Likewise, the risks of the shale revolution could be increased. These alternative energy projects may be suspended. Investment in the energy sector might plummet as well.”