The impact of oil and gas prices on the Russian budget over the past few years

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 Budget revenues compare revenues: oil&gas vs non-oil&gas

Oil money is unpredictable but here we can very clear trend growth in non-oil&gas revenues  diversification

 Non-oil&gas was x1.5 oil&gas revenues in 2011, but now it is x4 more so 75% of revenues is now not oil and gas versus 60 % in 2011.

Oil and gas sector (not just drilling) is currently 16% of GDP.

Agriculture  growth clearly one source of rapid non oil&gas revenues.

Retail growth is  another source of non oil revenues 

We are also  getting anecdotal reports of rapid growth of light industry driven by RUB devaluation that I suspect is another major factor in tax revenue.

Plus  there was a massive reform in tax collection under Mishustin who was then promoted for his succeses to a role of new prime minister. You can find information that without increasing taxes there was about 20 % increase solely to better tax collection

And also higher VAT rate from 18 to 20 % starting from 2019

So, summing up all the OPEC talks, I advise you to take into account two contradictory trends. On the one hand, Russia is a country of course poorer than most oil producers from the Persian Gulf, but on the other hand, it is now a country much less dependent on hydrocarbon prices, which is important for any OPEC + strategies.

 

Edited January 5, 2021 by Tomasz

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Consequences on 5th January 2021 on OPEC meeting. 

Just like last year the Saudis defeated the Russians, now the situation has probably turned around.

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Update (1310ET): In a quite shocking update, the Saudi minister just confirmed the size of their unilateral cuts... and it's a huge surprise.

Saudi Arabia to make voluntary cut of 1 million barrels a day, for February and March, taking its output to 8.1 million barrels a day.

Prince Abdulaziz said of the cut:

“First and foremost, it’s a pre-emptive measure,”

“We do that willingly.”

“We will support the market, we will support the industry,”

As Bloomberg's Julian Lee notes, aside from the one month of June last year, when The Kingdom made a similar voluntary cut of 1 million barrels a day, this will take Saudi Arabia’s production to its lowest level since 2009.

That lifted WTI back above $50...2

Russia's Novak called the Saudi decision a "New Year Present."

Amid winks, nods, and rumors, WTI Crude futures have just surged back above $50 for the first time since February after OPEC+ appears to have agreed on a small crude output hike in February.

As Reza Zandi reports, OPEC+ will increase the current level of production by only 75 thousand bpd instead of 500 thousand bpd.

Russia’s February production quota increase from 9.119 million bpd in January to 9.184 million bpd. For March, Russia’s production quota again increases to 9.249 million bpd.

That the non-OPEC group was the only group afforded increases in production over the next two months, with OPEC, therefore, shouldering more of the burden for the market’s production cuts highlights OPEC’s waning influence in the market as a lone player, and Russia’s growing influence over the oil markets.

Regardless of how the deal shook out between the members, the oil market cheered. Oil prices rallied in the afternoon, with WTI rallying more than 5% and Brent rallying just under 5%.

Additionally, delegates claim that the Saudis plan to make voluntary output cuts in February (rumored to be 400k+ b/d), which is quite a shocking signal of The Kingdom's determination to "re-balance" the oil market.


Bloomberg's Javier Blas reports that Saudi Arabia has not disclosed to other OPEC+ countries the size of its voluntary output cut - and we must emphasize, this is so far an offer. Riyadh has yet to announce it formally.

Saudi Energy Minister Prince Abdulaziz bin Salman may use the OPEC+ press conference to confirm the plan, and disclose the volume.

Bloomberg's Julian Lee raises an important point in noting that this is starting to look like absolute desperation to keep Russia on board with OPEC+ supply management. The increase may be tiny and the duration short, but it sets a terrible precedent, particularly after the public humiliation handed out to the UAE when it over-produced briefly in June.

 

Edited January 5, 2021 by Tomasz

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This is a bigger story than what happened on Capitol Hill on Wednesday because that was a continuation of a story whose end was already written.

Joe Biden will be President. 

Now that has far-reaching effects on a number of markets, including oil. But, again, we’ve known Biden was taking office, if we’re being honest with ourselves, since election night when the civil war in the U.S. officially began.

So, we’ve known that Trump’s push to become the controller of oil markets was coming to an end. We’ve also known since the Coronapocalypse that U.S. oil production had peaked and could only go down from there.

Yes Russia’s production dropped by a similar amount, around 2 million barrels per day, averaging 10.27 millions of barrels per day in 2020. But the difference here is not in how much is produced but in what it costs to produce those barrels.

And not just any barrel, but the marginal barrel… the last barrel.

Because he who has the lowest marginal cost of production ultimately can and will be the price setter for any commodity. Russia has, by far, the lowest cost of production of the major producers when adjusted for currency effects.

The 2020 EIA report on breakeven oil prices — the price needed to balance the country’s current account — for major producers sheds some light on the subject, but everything is normalized to dollars in terms of cost. Under that analysis Russia comes in at around $42 per barrel and Saudi Arabia at around $64 per barrel.

But that doesn’t reflect the economic reality of each producer unless they are dependent on dollars to source their expenses. Russia is most definitely not in that position. The oil industry there is homegrown.

Expenses are paid in rubles, parts are manufactured locally, and this is where the big advantage lies. I’ve been banging the drum for three years now that Russia’s currency is its ultimate weapon in the oil price wars.

Because Russia with its homegrown oil industry is far less exposed to a dollar drop in the price of oil to maintain internal production costs. The ruble rises when oil prices fall and the income is buffered by this while expenses stay relatively constant.

On the other hand the Saudi riyal is still pegged to the U.S. dollar and is trapped by it. The same goes for U.S. domestic producers, who have had it even worse now that the debt-fueled mania of the Trump years is over.

Access to cheap capital is over. Rates will rise in the U.S. over the next two years. There was just a major technical breakout on the 10 year Treasury note.

These things combined, along with Russia’s flexible taxing regime on oil profits, give them a sincere advantage over their rivals.

So, what happened this week that was so important? The Saudis unilaterally offered to cut production by 1 million barrels per day. While, at the same time, OPEC+ accepted that both Russia and Kazakhstan would increase their production at their January meeting. It doesn’t matter that it was a paltry 75,000 barrels per day.

What matters is the message.

Saudi Arabia is no longer the price setter through massive market share in oil. Period. They surrendered to the Russians.

Oil markets rallied on the news and Brent Crude is setting up today to close the week on a technical breakout above $50 per barrel.

 

 

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Russia’s low growth rate is mostly the result of extremely strict monetary and budgetary policies designed to cushion its economy from exogenous shocks, i.e. sanctions and speculative attacks. As a result, it underperforms during global expansionary phases, but outperforms during recessions. This is why its economy wasn’t hit as hard by covid. It is difficult to imagine a geopolitical easing of tensions at this point in time, but the potential to significantly increase nominal GDP growth certainly exists simply with the slack available in credit expansion alone.

Russia had a very nice decade in the 00s and an underwhelming decade during the 10s, due largely to factors beyond its control (end of the commodities supercycle in 2014 and monetary + fiscal constriction). These things usually smooth out over the long term, so I suspect Russia will have a nice 20s decade.

Edited January 30, 2021 by Tomasz