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Russia faces budget deficit as oil prices plunge

Country would likely have to rein in either social or military spending programmes

Gulf News

Abu Dhabi: The Russian economy is badly hit due to sanctions and fall in oil prices, energy analysts said. It is expected to record low growth and high inflation in the coming days.

Global oil prices have been plunging for the past few months due to oversupply partly caused by US shale oil and weak demand in the market.

The Organisation of the Petroleum Exporting Countries (Opec) which met last week failed to take a decision to cut the production causing the situation to deteriorate further.

“The drop in oil prices is not good news for the Russian economy. It is already under sanctions due to its involvement in Ukraine. The country is expected to see low growth in the coming days,” said Arjuna Mahendran, chief investment officer at Emirates NBD. “It has to move out of Ukraine and allow Western investment to come in. We don’t see that happening soon.”

He, however, added that the country will tide over the crisis because of its vast size and abundant natural resources.

Despite the declining oil price, Russia has pledged not to cut production. The country is planning to keep 2015 production levels stable at 2014 levels which is about 525-526 million metric tonnes.

Justin Dargin, a global energy expert at the University of Oxford, said the sharp decline in oil prices is placing Russia’s governmental budget into deficit territory. He said the Russian government appears to believe that the drop in oil prices will not last in the long term and that oil prices should stabilise by 2015.

“For years, Russia has been attempting to diversify economically, but it has not yet been successful as oil still comprises a significant portion of its foreign revenue,” Dargin said.

Recession

Russia’s economy is in a sharp nosedive as the impact of sanctions and the decline in the price of oil has hurt it immensely. Russian government officials said on Tuesday that low oil prices and sanctions imposed on Moscow over Ukraine will send the Russian economy into recession next year. Deputy Economy Minister Alexei Vedev said the country’s GDP (gross domestic product) is likely to fall by 0.8 per cent next year, as opposed to an earlier forecast of 1.2 per cent GDP growth.

The Russian federal budget is based on an oil price of $100 per barrel. Each dollar reduction in the price of oil causes Russia to lose approximately $2 billion (Dh7.34 billion) of annual revenue.

“The double whammy of Western sanctions and the oil price decline has caused the rouble to lose 30 per cent of its value since January against the dollar,” Dargin said.

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