An oil refinery in Omsk, Russia
Falling energy prices are a problem for countries reliant on oil and gas extraction, but are not the disaster they might intuitively seem, with risk analysts holding off from downgrading Russia while eyeing Kazakhstan with more concern.
That doesn’t mean Russia will not experience economic pain. Most countries, whether oil producers or not, will suffer the consequences of indefinite lockdowns as the coronavirus spreads.
And Russia’s economy was already exhibiting weak economic growth dynamics, with just 1.3% real GDP growth in 2019 constrained by weak private consumption and exports.
The crisis will only make matters worse for a while, through the channels of exports, consumer demand and private investment, undermining the rouble, and making the economy contract in 2020.
That fact is underlined by analysts downgrading relevant factors for GDP growth and currency stability in Euromoney’s risk survey.
One of those experts is Constantin Gurdgiev, a professor at the Middlebury Institute of International Studies, who nevertheless echoes the views of others when noting that Russia is in a more favourable position than other oil exporters experiencing the combined supply and demand shock.
“Russia is exposed to the risks presented by the sudden stop in demand and supply chain disruptions, but unlike other former USSR economies, with extensive oil and gas exposures, it has a more diversified economic base.
“Russia also has lower break-even production and shipping costs for natural gas and oil due to its proximity to the main markets (Europe) and lower capital costs of existent infrastructure.”
Compared with Saudi Arabia, which requires a break-even oil price of more than $80 per barrel, Russia’s is around half that and energy minister Alexander Novak has further claimed with some bravado that Russian oil production is competitive at any price.
This explains why, so far, Russian authorities have been reluctant to come to some sort of arrangement with Opec to limit production, despite Trump’s hopes for a deal buoying the market in recent days.
It means the oil price shock effect will be much less pronounced for Russia than most other oil exporters.
Indeed, preliminary data from Euromoney’s first quarter survey – to be officially released next week – shows risk scores worsening for oil-producing countries as diverse as Egypt, India, Indonesia, Malaysia and Norway.
Russia has built up substantial foreign-exchange reserves, it has a flexible exchange rate and an extremely strong and resilient fiscal position
Worst affected are Iran and Iraq, given their myriad other heightened economic and political risks. In those two countries, the fiscal shocks are likely to be most severe and less easily absorbed.
By contrast, Russia has built up substantial foreign-exchange reserves, it has a flexible exchange rate and an extremely strong and resilient fiscal position, with room to support the economy using fiscal and monetary stimuli – and its overall country risk score has shown resilience as a result.
Finance minister Anton Siluanov refuses to fret, pointing out that Russia has a sovereign wealth fund topped up with last year’s budget surplus worth $157 billion (11% of GDP). This can be used to cover the budget gap in any crisis for a period of four years, with $580 billion-worth of foreign-exchange reserves available to cover a decade of low oil prices.
Gurdgiev notes, moreover, that in food commodities sectors – those in which Russia has built substantial positions globally in recent years – it can sustain notable price declines to protect its market share, even if the demand for these commodities were to suffer in the longer run.
Kazakhstan more vulnerable
The situation in Kazakhstan seems more concerning, not least because any efforts made to diversify the economy after the last oil crisis have only led to the agricultural sector and infrastructure expansion becoming more vulnerable to China now suffering its own economic woes.
President Kassym-Jomart Tokayev officially declared a national emergency in mid-March and has outlined a $10 billion package of measures to protect vulnerable groups and support business, but with swingeing cuts to other aspects of the fiscal budget for 2020 that was based on an oil price assumption of $55 per barrel.
The government has gone further by announcing a daily situation briefing, supporting a stronger country risk score for information access/transparency.
However, economic risk has deteriorated across the board, notably for the GDP outlook and currency stability factors, and more so than Russia.
The fear is that the economy will be severely affected, with the currency sent spinning again as the fallout between Russia and Saudi Arabia over oil supply compounds the impact of lockdowns on demand and as higher interest rates bite.
Still, risk experts warn against assuming worst-case scenarios.
Kazakhstan will not emerge unscathed, but many have pointed out the fact that GDP avoided contracting on an annual basis during the previous oil crisis, slowing instead to a crawl, and the country does possess a sovereign wealth fund to see out any short-term shocks.
On the other hand, it is also a big test of social cohesion for an authoritarian kleptocracy that has already witnessed a series of recent civil protests, and which unlike Russia may not be able to prevent it from becoming an unstoppable force.