Citigroup analysts predict a rise in oil prices above 60 Usd already by the second half of 2017, and a rise in oil prices up to 65 USD/barrel by the end of the year. What effect will it have on resource-dependable economies?

We asked Russian financial experts to comment on the forecast of Citigroup, by answering three questions.

If Citigroup’s forecast comes true, how will it affect Russian economy as a whole and the ruble in particular?

Evgeniy Chekai, head financial analyst of “Analitika online Kazakhstan”:

– This is a very favorable scenario for Russia, since with such oil prices there will be almost no deficit in the budget, which will give the powers freedom of maneuvering on the eve of presidential elections of 2018. Rise in oil prices will stimulate economic growth and will make Minekonomrazvitiye’s basic scenario that supposes that GDP will rise this year by 2%, more realistic.

Pyotr Pushkarev chief-analyst GK TeleTrade:

– I don’t consider very likely the possibility of a rise in oil prices to the 65 dollar mark by the end of 2017. Market has shown that it feels comfortable in the 53-58 USD/barrel range. Demand and supply are pretty well balanced in that price scope especially with the current volumes of falling gains, but the price is capable of slipping a little lower, which we have seen recently.

What is important is whether the agreements of a group of OPEC plus countries will be extended at the end of May for the period of another 6 months (or for three months first) in order to keep in check the ardency of slate producers. For now the volume of slate extraction grows in quite moderate pace, the number of extraction installments today is 2.2 times lower, than at their peak 3 years ago, however, there is a lot more of them now, then there was at the “bottom”; a factor which OPEC and oil market will take into account.

Is ruble strengthening beneficial for Russian powers?

Evgeniy Chekai, head financial analyst of “Analitika online Kazakhstan”:

– The only issue that the government will have to solve is strengthening of ruble, which will have a negative effect on the economy, lowering the income of exporters and dramatically reducing advantages of domestic goods before imports.

Pyotr Pushkarev, chief-analyst GK TeleTrade:

– How much will Russian budget gain from growth of oil prices to 60 dollar mark and higher, if such a growth will take place? There are different estimates, one of the most convincing ones was voiced by Russian president during direct line at the end of 2016: increase of oil prices by 10 dollars will bring around $28.6 bil. into the federal budget plus another $12.2 bil. of income will be received by oil extraction trusts, which will be able to invest this money into development of oil extraction, infrastructure, that in the end is also related with future profits of the budget.

Also, this can increase profits of workers, not only in the oil sphere, since growth of income in one sphere of economy, always leads to the growth of demand and to chain reaction in other complementary spheres. President has voiced a possible addition to the budget at the rate higher than 60 rubles/dollar, which was relevant at the time, and the addition by his calculations could make 1.75 tril. rubles.

As we know, ruble is stronger now, while the level of oil prices has remained the same, so if we recount with increase to the exchange rate, say by 55 rubles, the budget will still receive over 1.5 tril. rubles in addition to planned numbers – even with the current level of oil prices. If, however, even in the range of 2-3 months, oil will rise up to 60-65 USD/barrel range, the budget of 2017 may fill up by over $2 tril. Such rise would be due to oil tax.

A more significant fall of the dollar down to 50 ruble/USD mark or lower is also highly unlikely, since rate of the ruble recently has depended more on international increment of exchange rate between ruble and currency asset: we have much higher bond payments, i.e. payments on guaranteed governmental and corporate stock. But this difference in rate remains either unchanged, or has a tendency to decrease following small decreases in refinancing rate of the Central bank. Thus, attractiveness of Russian assets in terms of receiving of income remains, but the interest goes down as the difference in interest rates goes down, and also as surplus in market streghtening of ruble accommodates.

There are also more conservative estimates with regards to additions to the budget, one of which was given by deputy head of VEB Andrey Klepach: one dollar per barrel in oil prices gives budget from 100 bil. rubles or more. But even with this we see that numbers of additions to budget turn out comparable and significant.

Considering that from the beginning budget was created based on quite pessimistic scenario of prices of 40 dollars/barrel, this will easily cover budget deficit without any means of artificial devaluation of Russian currency and will also let us preserve the reserve fund until the next year.

Ivan Kapustyanski, Forex Optimum analyst:

– Dynamics of the oil market directly affect national currency. Even though Russia’s share from oil profits is decreasing, but remains pretty high for now. In case of oil prices rising to 65 dollar/ barrel mark, Russian currency will continue to get stronger.

For the budget overall, fluctuations on the currency market are not critical. The issue is for there to remain a balance of 3000-3300 rubles/barrel. Situation with business is slightly more difficult. With lowering of the exchange rate, domestic exporters start to lose, however the ones who win are the companies that try to renew main funds by purchasing them abroad.

Overall for business, the rate has to be neither low nor high but stable. With time, companies adapt and do not get negative effects from high volatility.

Do you agree with the notion that even with high oil prices, reserve fund can be saved only through devaluation of Russian currency?

Evgeniy Chekai, head financial analyst of “Analitika online Kazakhstan”:

– New prices can correct Russia’s budget deficit and situation with reserve funds. If oil prices will be above $60/barrel, life of reserve fund will be extended. The issue is that country’s reserves are not being spent efficiently, government is spent reserves with one hand and invested budgetary funds into deposits and bonds and stocks with another, thus provoking an even higher expenditure of reserves. But devaluation of Russian currency is not the only solution. If the agreements of OPEC and non-OPEC countries will only remain on paper and prices will go down, then the Fund for national prosperity, which was created first of all for supporting of pension fund will be used for financing budget deficit.

Pyotr Pushkarev, chief analyst of GK TeleTrade:

– In reality, as the practice of Ministry of finance’s actions shows, as of today reserve fund is not being spent but rather replenished at the moment, through the purchases of currency by ministry of finance, in particular from extra funds received from higher oil prices. Those are the very purchases by ministry of finance for the purposes of refilling of reserves, which many erroneously view as market interventions with the purpose of affecting currency rate in the direction of weakening of ruble. In reality, these purchases do not pursue this goal, and they can’t play such role, if only because of the insignificance, by market standards of such purchases: less than 0.5% from daily volume of auctions at Moscow stock exchange.

It is unlikely that under such policy and under these conditions reserve fund can be exhausted by the end of the year. But if such event were to happen, the reserve fund itself is nothing more than a pocket, where a certain share of total forex reserves of central bank was deposited, regularly in the past, as well as into fund of national prosperity. These funds were formed specifically for crisis events, but if the need arises a certain necessary part of our forex reserves can be allocated to it following a decision by the government.

There is nothing especially bad in this, considering total forex volume of $400 bil. and this doesn’t carry a threat to financial security as of today. It is not deficit-free budget that should be formed (this goal should not even be put forward, as it will only harm to Russia), but Russia needs a development budget rather than a budget of total saving.

It is very important to further support agriculture, the whole non-energy export sector, growth of economy. This won’t become the new oil right away, but non-energy export already started its growth  in 2015-2016 with good pace, it is not necessary to spare budgetary funds on stimulating of these sectors.

In light of this, how bad or good is strengthening of ruble? There are both positives and negatives here – exporters receive less money in rubles, the treasury receives less as well, it is harder to create, and the burden from a very strong ruble seemingly falls on our entire new export potential. However, this is a sword with two edges situation: strong ruble is a result of central bank’s policy as well as of ministry of finance’s, which allowed to simultaneously lower inflation – officially 5.6% in 2016, which is already a huge accomplishment, and now this percentage continuously approaches the state CB’s level of 4%.

Why is this so important and how does it help economy and private firms? Low inflation coupled with high interest rates by central bank created a unique difference if potentials, which assured an inflow of significant capital into the country not only from profiteering but also from mid-term and long-term investors, who continue to invest in Russian bonds en masse, both into ministry of finance bonds and into corporate sector. These funds won’t disappear until favorable difference in conditions on high returns and relatively low inflation remains. And this money will flow into our economy, our budget, which stimulates growth points in the economy replacing those credit lines, necessary for the country, which we lost due to sanctions.

Strong ruble also lets our industrial firms and agriculture purchase necessary hardware and  technology ; that would be impossible under a cheap or uncontrollably weak ruble. Thus a weak ruble, while helping exporters and economy resolve pressing issues, would cut opportunities for structural changes for the economy. Thus this exchange rate of relatively strong ruble that we have today, could be called overall a balanced one, it might be slightly overpriced, but by no more than by 3-5% which meets the demands for now.