It has been almost a year since the oil has firmly entered the new era of low prices. And in December it has been a year since Russia had officially stepped into crisis following the downward trend of the oil price. The oil price fall that began in mid-2014 has hit a number of oil producing countries worldwide, but Russia took a stronger hit since its position was weakened by sanctions, imposed by Western countries. Together, these factors have facilitated the depreciation of Russian Ruble (RUR) by around 40%, compared to its value in July, 2014, and spurring inflation in the country up to 11%. These events have rekindled old questions and criticism of the government policies and the social-economic reforms in the country, or rather the lack of adequate reforms, which only strengthened country’s position as a crude-exporter.
Hence, it is not surprising that in 2014, energy taxes constituted more than 50% of the government revenues. As it was repeatedly emphasized, oil prices slump has just exposed the sickly state of Russian economy by stripping the government of large oil-revenues to the budget, which it has used to boost economy growth for past 15 years. Naturally, RUR has been deriving its strength from oil & gas prices. (Table 1 shows the relationship between oil & gas industry, currency and national GDP of Russia).
Naturally, the Russian government knows the value of exports all too well. This is why most activity from Russia on the international business scene was related to oil and, most of all, gas exports. The climax of this activity was the signing of 30-year gas deal with China, which was worth around $400 bn. Oil industry didn’t stay idle either: last year oil output reached historical levels since the USSR at more than 10 mln barrels per day. Moreover Russian output is not going to recede in near
future. This is because not only the producers are trying to retain their market share but also the government does not have a direct control over production, like OPEC countries do. Only long term low prices and a lack of investments and technologies as a result of sanctions can force the companies to reduce their output (estimated at 5-10%).
Last year already landed a blow on Russian oil & gas companies, when they lost their key foreign partners in offshore development. Moreover national capital markets suffered from the capital flight that saw a record $150 billion of net outflow from the country following the downgrade of sovereign rating of Russia down to “junk”.
However, past year wasn’t entirely damaging for Russian oil industry. The oil companies have significantly benefited from the slump in Ruble, since it offsets the fall in oil prices. It was possible due to the fact that Russian oil companies receive most of their revenues in US dollars and incur most of their operational expenses in Rubles. This makes Russian companies’ positions stronger than their foreign peers who incur their costs mostly in dollars. Taxation has become another soothing for the companies. Due to peculiarities of oil industry’s taxation, the companies would have to give away significant chunk of their revenues to the government during the age of high oil prices. However when the prices go down the taxation system provides extra buffer to the oil companies that add another bonus to Russian oil companies, compared to their foreign peers.
Nonetheless, if the current situation with the capital markets and sanctions persists, then Russian oil companies are most likely to have their output falling in the future especially, with no technologies and investments readily available for them to expand on new and complex oil fields.