The world’s biggest oil producers have not agreed to freeze the production, and the price of crude oil has sunk. Russia is the non-OPEC country that urges the most an agreement and many in Moscow were hoping for it. Now they have to do their sums again.
There were many people waiting for the meeting in Doha, especially in Moscow. The biggest oil-producing countries, including non-OPEC Russia, had gathered in the Qatari capital for what was believed to be a mere formality to freeze output at January levels until October 2016.
But already on the eve, the smiles on the faces were fading away. When it became clear that there would be no agreement, official channels tried to mask it as a delay, but the markets have taken for what it is, a failure.
“Yes, this was Saudi Arabia and a number of OPEC members, including UAE, Qatar,” said the Russian Energy Minister, Aleksander Novak, assuming that the effects for Russia would be minimal. “Mostly these were states of the Persian Gulf. Russian companies continue to operate with high competitiveness in the market”.
In the same minutes, the price of WTI oil shrank by almost 7%, stopping at $ 37,6 a barrel. Not good news for Russia.
In the red
Immediately after the ruble sank to its lowest level in almost three weeks and the Moscow RTS stock index lost 3.6 percent.
“The Russian budget is starving,” said Alexander Nazarov, an oil and gas analyst at Gazprombank
While Putin had signed into law a 2016 budget based on an average oil price of $50 a barrel and the deficit at 3 percent of gross domestic product, the Doha failure change things in worse.
Finance Minister Anton Siluanov seems to be sure of it. The Reserve Fund shrank almost by half since its 2014 high, and authorities risk depleting it by the end of the year, Siluanov said.
According to a calculation made by the New York Times, when oil was sold at about $ 100 a barrel, the Russians oil companies poured some $ 74 to the state in taxes. Now that $ 35 are enough to buy a barrel of crude oil, the amount paid to the Treasury is just $ 17.
In terms of profits, the situation is even worse. During the fat days, for every barrel the companies pocketed $ 11, net of extraction and delivery costs. Now the profit has dropped to a mere $ 3 per barrel. The oil companies are not going to invest in the search for new fields, convinced that the money invested will not return even in the next ten years. The paradoxical effect is that the collapse of production, estimated in 46% by the Economy Ministry, would thwart agreements, like the one attempted in Doha.
Austerity, Russian way
The Kremlin is reported to be discussing a new tax on oil producers. But it could be a double-edged sword. The cash of the oil companies are still fat indeed, but further cleaver on their future earnings could trigger an even more negative spiral.
According Siluanov, budget measures totaling $19 billion are needed to avoid a shortfall of more than 6 percent of gross domestic product this year, including spending cuts of 10 percent.
And the effects are already visible. The lack of money has already hit the showcase project of the bridge over the Kerch Strait, which will link Russia to Crimea. An infrastructure worth $ 3.2 billion that, despite Putin’s imprimatur, will not see the light in 2018 as expected, but “by the end of 2019,” according to the Federal roads agency Rosavtodor.
But it’s the whole superpower dream to be affected. The deputy defense minister, Tatiana Shevtsova, announced a 5% cut in military spending in 2016. This is the second cut after that of mid-2015, when the expenditure had been reduced by 5.7% for the year (but still on the increase on 2014). Meanwhile, Russia has been ousted from the podium of the countries with the highest military expenditure in the world, giving third place to Saudi Arabia. The same Saudi Arabia that has put a spoke in the wheels in Doha.
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The world’s biggest oil producers have not agreed to freeze the production, and the price of crude oil has sunk. Russia is the non-OPEC country that urges the most an agreement and many in Moscow were hoping for it. Now they have to do their sums again.
There were many people waiting for the meeting in Doha, especially in Moscow. The biggest oil-producing countries, including non-OPEC Russia, had gathered in the Qatari capital for what was believed to be a mere formality to freeze output at January levels until October 2016.
But already on the eve, the smiles on the faces were fading away. When it became clear that there would be no agreement, official channels tried to mask it as a delay, but the markets have taken for what it is, a failure.
“Yes, this was Saudi Arabia and a number of OPEC members, including UAE, Qatar,” said the Russian Energy Minister, Aleksander Novak, assuming that the effects for Russia would be minimal. “Mostly these were states of the Persian Gulf. Russian companies continue to operate with high competitiveness in the market”.
In the same minutes, the price of WTI oil shrank by almost 7%, stopping at $ 37,6 a barrel. Not good news for Russia.
