20/7/15: Of 'Break-Even' Oil Prices & Russia

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

Which puts Russian break-even at USD105 pbl.

Reality is: Russia has 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. Which underpins revenue side of the budgetary balance somewhat.

Meanwhile, Russian Government own budgetary estimates put break-even price of crude at around USD80-85 pbl, not USD105 pbl, closer to UAE, than to Oman.

Worse, for Deutsche, Russian budget is expressed in rubles, not USD, which means that 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 falling 'fiscal break-even' price of oil for Russia.

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

What is, however, clear is that Russian current account (external balance) is in black and it is improving, not deteriorating. Latest Balance of Payments data shows current account surplus of almost USD20 billion in 2Q 2015. Over 12 months through June 2015, current account surplus is at 4% of GDP. The driver here: decline in imports (down 40% in dollar terms in 2Q 2015 y/y) outpacing drop in exports (down just under 30% y/y). In January-June 2015, trade surplus was USD70 billion (USD210 billion in exports, USD140 billion in imports).

Balance of payments is also being supported to the upside by a decline in capital outflows. 2Q 2015 capital outflows amounted to ca USD20 billion, predominantly comprising banks repayment of maturing foreign debt (remember, this improves banks' balancesheets and deleverages the economy). However, direct investment from abroad into Russian non-fianncial corporations rose over the 2Q 2015, resulting in an increase in foreign debt held by the non-financial sector.

Overall, Russian Central Bank shows foreign debt position at ca USD560 billion (or 30% of GDP) at the end of 2Q 2015 - basically unchanged on 1Q 2015 and down from USD730 billion at the end of 2Q 2014.

And another reminder to fiscalistas:

• Russian public (Government) external debt currently stands at USD35 billion. 
• State-controlled banks hold further USD90 billion in external debt (total banking sector external debt is USD150 billion and 60% of that is held by state-owned banks).
• State-controlled NFCs firms hold ca 40% of USD360 billion foreign debt written against Russian NFCs, or USD144 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 USD150-160 billion. 

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

31/5/15: Russian Fiscal Performance: Red Alert in Jan-Apr 2015

Russian Government finances are showing some serious signs of strain in April, lagging the 1Q 2015 outruns. In 1Q 2015, public revenues (the consolidated budget including federal, regional and local governments, state social funds) rose only 1% y/y in nominal ruble terms. Adjusting for inflation and ruble revaluations, this suggests real contraction of around 9-10 percent. Over the first four months of 2015, export duties returns and production taxes in oil & gas sector were down more than 20% y/y with 1Q 2015 decline of 15% y/y. Ex-oil & gas revenues, consolidated revenues were up 8% in ruble terms (nominal) in 1Q 2015.

Real trouble, however, is brewing on spending side. 1Q 2015 consolidated expenditures rose 20% y/y in nominal terms, with defence spending rising 50% y/y in 1Q 2015 and 45% in the first four months of 2015. Pensions and Social Security expenditure rose by around 30% y/y. Nominal spending on education and health remained largely unchanged.

The consolidated deficit for 1Q 2015 was 2.5% of GDP.

Source: Bofit

Now, some of the expenditure items were significantly front-loaded, especially for housing expenditure and defence. Which means that over the rest of 2015 we might see some moderation in these lines of spending and weaker adverse impact on deficits. Still, things are not exactly encouraging, neither in terms of structural nature of imbalances nor in terms of sustainability of such spending given the levels of official reserves.

5/5/15: Good Bonds, Bad Rules & Russian Deficits

Neat chart via @sobberLook showing Russian 2-year bonds yields out through today:

The blowout is over, but at 10.9% still ahead of anything 'normal' and remains pressured. To me, real test will be around 9.7% levels and then again around 9%.

Meanwhile, on a supportive side of things, Russia is about to decouple its budgetary balance estimates from the 3-year (back) average oil price rule, by switching to RUB denominated oil price benchmark. Which will improve the deficit calculations by bringing some reality to assumptions underlying the budget.

As the result of the switch, Budget for 2015 will see a correction in built-in oil price of RUB2,915, Budget 2106 - of RUB1,938 and Budget 2017 of RUB 760. Thereafter, the effect should be weaker, with Budget 2018 estimated impact is for price decline of RUB60. Current rule implies that Budget 2016 was to be estimated using oil price of USD89 per barrel, against the Economy Ministry forecast of USD60.  In 2015, Budget is computed using base line price of USD94 against the economic forecast (for the Budget) of USD55. Higher budgeted oil price implies higher spending, while revising the benchmark price down as per new proposed rule implies lower spending and, thus, lower deficits. So, in return, budget cuts and balancing of the budget, will be spread over longer horizon and will allow to more conservatively use Russian foreign exchange reserves.

More on this here: http://www.vedomosti.ru/newspaper/articles/2015/05/05/minfin-pridumal-kak-viiti-iz-lovushki-byudzhetnogo-pravila.