Is Russia Imploding In Front Of Our Eyes… Again?

Russia Oil 3

Source: thecommentator.com

Certain countries are starting to feel the pain of the low oil prices. In a previous column, we already warned you about the potential problems in Saudi Arabia that might spill over to the USA. Saudi Arabia was quickly moving towards a government deficit of almost 22% of the GDP, resulting in a shortage of $150B on the total budget in 2015.

Keep in mind that preliminary expectation was based on an oil price of $40-45 per barrel and as the oil price has continued to fall, Saudi Arabia’s finances have gotten worse by the week (and even by the day).

But Saudi Arabia isn’t the only country that is feeling a huge impact from the low oil prices, as Russia for instance might have some more issues to dig itself out of the current government deficit hole. Whereas Saudi Arabia was smart enough to put quite a bit of cash in its sovereign wealth fund (which was the third largest in the world) to reduce the impact of the economic shocks, the Russian economy isn’t as well-prepared as the Saudi Arabian economy.

Even though Russia says it has been preparing for an average oil price of approximately 40-60 dollars per barrel during the next several years, we remain unconvinced about the country’s readiness to indeed be able to cope with a continuously low oil price, and it’s really hard to imagine the country can indeed survive it at all.

Russia Oil 1

Source: Bricplusnews.com

Indeed, at the Davos forum in Switzerland, Russia has quietly tried to open the door with the international community to try to find a way to reduce the pressure on the Russian economy, and the government officials are hoping to see for instance the European Union become more flexible with the economic sanctions as that will very likely be the only way to avert a horrible economic crisis (and potential collapse of the country’s entire  economic and financial system).

Since the beginning of this year, the Russian Ruble has lost approximately 10% of its value, indicating the market is also becoming increasingly reluctant to believe Russia’s expectations, and the low oil price has sent the Russian Ruble tumbling as the currency lost approximately 60% of its value since May last year. Not only will the government budget deficit be much higher than anticipated (the expected $50B deficit was based on an oil price of $50/barrel, whilst the current oil price is trading quite a bit lower than that level.

Russia Oil USDRUB

Source: Google Finance

In our opinion, Russia has approximately 12-18 months left at the current oil price before the country reaches a point of no return , as its foreign reserves are dwindling due to the lower oil revenues. And that could actually be a dangerous situation, as Putin isn’t exactly the kind of person who’d be sitting on his hands when the economy is collapsing. And a bear that’s being backed into a corner can do something dangerous to draw the attention of the population away from the failing economy.

The best cure for low oil prices are low oil prices, that’s for sure, but is Russia able to wait for these higher oil prices? It’s not just Russia’s oil sector that is depending on the oil price, but the entire economy. Saudi Arabia’s government deficit is worse, that’s true, but the country has a much bigger war chest to wait this one out, whilst Russia is already seeing the bottom of its foreign currency treasury.

Russia Oil 2

Source: crudeoilpeak.info

And oh yes, the last time we saw the oil price plunging like this (and staying at a low level for a prolonged period of time), it actually was the start of the Soviet Union falling apart.

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