Price of Oil Can Crush Russia it happened in ’86 It can happen in 2014?
In case you hadn't heard, Russia has an oil problem. The country is heavily dependent on oil tax revenue to fill its coffers, and trouble is brewing given today's low price for Russian crude. Consider these recent headlines from Reuters and The Moscow Times:
"Russian oil prices fall below $100/barrel, straining budget"
"Struggling with Sanctions, Russia Faces Oil Price Crash"
And if you go all the way back to the end of April, BBC News gives us this gem:
"Russia experiencing recession now, says IMF"
Things sound grim, but what exactly is going on? Can the price of oil really bring down a country as big as Russia?
It can, and it has. Let's take a closer look.
Counting on oil to make ends meet
According to Reuters, Russia's budget is based on the assumption of an average oil price of $114 per barrel. It is nowhere near that high right now, however. Sitting below $100 for the first time in over a year, the price of Ural crude has fallen $15 in less than one month.
According to Reuters, Russia's budget is based on the assumption of an average oil price of $114 per barrel. It is nowhere near that high right now, however. Sitting below $100 for the first time in over a year, the price of Ural crude has fallen $15 in less than one month.
Keep in mind that 50% of Russia's budget revenue comes from oil. If the price bounces back, there is no story here. If, however, there is a sustained period of low oil prices it would be a major blow to the country's economy.
Fool me once...
An economic collapse caused by falling oil prices? What is this, 1986? Let's do what every major pop star is doing right now and revisit the 1980s. Here's Tyler Priest writing for theJournal of American History in 2012:
An economic collapse caused by falling oil prices? What is this, 1986? Let's do what every major pop star is doing right now and revisit the 1980s. Here's Tyler Priest writing for theJournal of American History in 2012:
Facing falling demand in the early 1980s, OPEC tried to restrict output and hold individual producing nations to production quotas, but cheating and discounting could not be prevented. In the summer of 1985 Saudi Arabia decided it would no longer defend the OPEC price and turned on the taps. Other OPEC exporters followed suit, each striving for market share and ignoring the cartel's quotas. World production surged and prices collapsed, reaching a low of $14 per barrel in 1986.
So we've got the price collapse, but how did that relate to the Soviet Union specifically? Priest again:
The oil price collapse also played a lead role in ending the Cold War. It undermined the economy of the Soviet Union, which had quietly become the world's largest oil producer, dependent on oil export revenues to pay for imported manufactured goods from the West and to support the economies of East European satellites. Plummeting crude prices cost the Soviet Union an alarming $20 billion per year, causing panic in the Politburo.
In other words, Russia's continued dependence on oil to power its economy could make its current troubles just another case of deja vu all over again. Are things really as bad as they were in the 80s? How close is Russia to the edge?
Reuters is reporting that every $1 drop in the price of Russian crude wipes out $1.4 billion in Russian tax revenue. That said, the Russian Finance Ministry has announced it still expects a slight budget surplus, provided the average price for the year comes out to $104 per barrel. And, despite the recent decline, the average price year-to-date is about $110, according to The Moscow Times.
The lesson in all of thisIn all likelihood Russia will be fine, but make no mistake: The threat is a legitimate one. The country has a $2 trillion economy that could be decimated if the bottom were to fall out of the oil market, and it is not alone in that regard. Saudi Arabia is a perfect example of how hard some countries are working to diversify their economies away from oil. Though we will never face the exact same circumstances in our world markets as we did in the 1980s, the precedent remains. The price of oil can collapse, even if the world's largest oil producers don't want it to.
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