By Rudiger Ahrend

23-10-01 The world's biggest problem at the moment is terrorism, and Russia's is falling oil prices. At least this is the impression one gets from reading the Russian and international press. Russian media and politicians continue to fret about the impact of a global slowdown on oil prices. Worse, even financial markets have started to worry and the RTS has recently been falling in parallel with the oil price, mainly amid worries about Russia's ability to meet future debt repayments.
This does not reflect much consideration of the longer term. While high world energy prices such as were experienced in 2000 may be good for Russian oil majors and natural-gas monopoly Gazprom, in the longer term they are clearly bad for the rest of Russia.

The explanation is simple. At prices around $ 26 for a barrel of Urals blend, Russia ran a current-account surplus of around $ 46 bn (roughly 18 % of GDP) in 2000. Such an imbalance is huge by any standards and either induces a rapidly appreciating real exchange rate or forces the Central Bank to print money on a large scale to buy up the incoming dollars.
The former is poison for Russia's recovering industry and the latter leads to sizeable inflation. Choosing between these two evils, the Central Bank has so far rightly chosen a small dose of the former, and a good dose of the latter. It will, however, not be able to maintain this course indefinitely without creating a major inflation problem. Hence, lower oil prices would be a great boon for the Russian economy.
Nevertheless, people worry about three negative effects of a sharp drop in oil prices. First, and most importantly, they fear Russia's current-account balance could turn negative, possibly leading to a repeat of the August 1998 financial crash. However, a back-of-the-envelope calculation shows that this concern is not seriously founded. In 2000, Russia's yearly current-account surplus was running at roughly $ 46 bn.

In 2001, given that imports are rising rapidly and assuming oil prices on a par with 2000, the surplus would probably be down at around $ 40 bn. If you subtract an estimated $ 8 bn to $ 12 bn of capital flight and $ 7 bn to $ 10 bn in debt-principal repayments, you are left with a surplus of around $ 20 bn.
A $ 1 drop in oil prices diminishes yearly export revenues by an estimated $ 1.5 bn to $ 2 bn. This means that oil prices could almost halve and the current-account surplus would still be sufficiently large for Russian citizens to send huge amounts of capital abroad and for the Russian government to service and pay back all of its maturing debts in the coming years.
Even if oil prices were to fall to historic lows and stay there for a prolonged period - something that is unlikely to happen -- a moderate depreciation of the rouble should be enough to keep the current account sufficiently in surplus.

The second concern, that lower oil prices will have a negative impact on economic growth, is equally unfounded.
The share of the Russian oil- and-gas industry in GDP is not very large in real terms. Moreover, a rapidly appreciating exchange rate or fast-increasing inflation would have a negative impact on the whole economy. A full-scale macroeconomic model of the Russian economy, developed for the Economic Development and Trade Ministry, confirms that decreases in oil prices have no negative impact on real GDP growth.

Third is the concern that with lower oil prices the Russian government will be unable to collect enough revenue to meet its budget obligations, and in particular to pay back its debt. Here, at least, there is a grain of truth. Falling oil prices decrease government revenues from oil and gas exports, by an estimated one fourth of a percentage point of GDP per dollar.
However, as long as a fall in oil prices is not extreme, the negative impact on government revenues should not be too large and the necessary adjustment should be easy to make. If there were a sharp drop in oil prices, the adjustment could be painful, but -- provided the political will was there -- would be economically feasible.
President Vladimir Putin and his entourage fully understand the crucial need for economic stability in Russia. Furthermore, they comprehend the foolishness of undermining this hard-earned stability by overspending for populist purposes, with the attendant risk of then having to default on debt repayment. Importantly, the Putin administration has sufficient control over the State Duma to marshal the necessary political support for making downward adjustment to budget spending, should it become necessary.

Finally, if things got really nasty, though there is no real reason that they should, the Paris Club, and especially Germany, would probably not deny Russia a helping hand and reschedule bilateral debt, something they rightly refused the Russian government in a period of affluence.
In view of all this, owners of traded Russian government debt should sleep soundly. And so should everybody else. Lower oil prices -- as long as they do not fall to extreme lows -- are nothing to worry about. That is, unless you own an oil company, of course.