Central Bank: low oil prices threaten the budget balance of the Russian Federation


MOSCOW, December 23. Low oil prices threaten the budget balance of the Russian Federation. This assessment is contained in the regular financial stability review Bank of Russia.

“Low oil prices pose a risk to Russia and other exporting countries from the point of view of balancing the budget”, – stated in the report.

According to the forecast of the Central Bank, the average oil price in 2016 will be $50 per barrel. The budget also laid the 2016 forecast $50 per barrel, but now the February futures for Brent crude traded on London exchange ICE $37,25 per barrel. The Finance Ministry reported earlier that it makes sense to prepare alternative calculations of the budget with oil prices at $40 a barrel or other assessments.

The regulator also notes that currently Russia is characterized by a low ratio of total public debt to GDP (13.6% of GDP as of July 1, 2015). However, concerns about the rapid pace of spending of the Reserve Fund to compensate budget deficit. “In order to ensure fiscal sustainability and reduce inflationary pressures necessary restriction of expenditure and level of the budget deficit in the medium term”, – reports the Central Bank.

According to the regulator, the abolition of the “fiscal rule”, which set the ceiling for government expenditure based on oil prices, as well as the absence of a mechanism of reservation of money in the Reserve Fund bear additional risks for the Federal budget of the Russian Federation.

Oil prices will remain at low levels

The report also notes that oil prices are likely to remain at low levels over the medium term.

“Commodity prices likely will remain low in the medium term”, – stated in the report.

The pressure on oil prices as estimated by the Central Bank of Russia will have first of all the slowdown in China – the main consumer of this resource. So, the key consumer economy – China continues to slow, structural transformation of the Chinese economy suggests the fast growth of the service sector and high-tech industries that are not characterized by a significant consumption of raw materials, according to Bank of Russia. In addition, high growth rates in China in previous years was achieved due to the rapid rise in total debt, which already exceeded 280% of GDP. In such conditions remains a possibility of further correction in the financial markets of China, the financial relationships may be underestimated, as a significant portion of the funding is due to the parallel banking system.

According to the regulator, in the 3rd quarter of 2015, there has been some deterioration in the external environment. The price of Urals crude oil, recovered in the 2nd quarter to $60 per barrel, amid economic slowdown in China and increased volatility in global financial markets in August resumed its fall and by mid November it dropped below $40 per barrel. At the same time stronger expectations of rising interest rates by the fed led to capital outflows and weakening of currencies of emerging markets.

According to the forecast of Bank of Russia, the average price of oil in 2016 will be $50 per barrel.

Further strengthening of the dollar

The Central Bank also forecast a further strengthening of the dollar against the backdrop of these rounds of rate hike by the fed.

“Further increasing of the rate will be accompanied by the strengthening of the US dollar”, – the report says. The contraction of credit dollars in a tightening of monetary policy by the fed may put pressure on commodity prices.

According to the regulator, after the fed rate hike in December 2015 will be the higher cost of borrowing in US dollars on different segments of the financial market (money market, the Eurobond market) and the increased demand for dollar liquidity. In addition, will increase the costs of refinancing accumulated debt. The CBR expects a correction in asset prices and sales of assets on local markets. The recent decrease in propensity of investors to risk has led to reduction of inflow of capital to emerging markets. The increase in the cost of attracting, servicing and refinancing of debt may lead to corporate defaults in selected emerging markets.

In mid-December, the fed decided to raise rates by 25bps.p. to 0,25-0,5%. Basic discount rate the fed last increased in June 2006 From December 2008 to date it has remained almost at zero – 0-0,25%. The rate increase reinforces the position of the dollar in the world.

Dollarization of deposits and loans

The report also stated that the depreciation of the ruble has not led to increased dollarization of deposits and loans in the Russian Federation.

“Despite the depreciation of the ruble by 15% from 1 April 2015 to 1 October 2015, in the banking sector has experienced growth in the level of dollarization of loans and deposits (the share of assets/liabilities in foreign currency in total assets/liabilities),” reads the report.

So, on deposits of physical persons, the level of dollarization from 1 April 2015 to 1 October 2015 decreased by 0.1 percentage points, deposits of non-financial organizations – by 4.5 percentage points, loans to individuals – by 0.2 percentage points, on loans to non-financial organizations – by 0.7 p. p. In nominal terms, the level of dollarization of all deposits for this period increased by no more than 2.7 percentage points credits – 2.5 p. p. Although the Russian banks still have a significant share of assets and liabilities in foreign currencies (the share of deposits of non-financial organisations in foreign currency amounts to 51% on October 1, 2015, lending up 37%), reducing the level of dollarization is a positive trend, confidence in the Central Bank.

Many other stable

The report notes that Russia looks stronger many other countries against the background of global economic challenges, such as the normalization of monetary and credit policy (increase interest rates by the fed) and the slowdown of China’s economy.

“Compared with other emerging markets, Russia’s position looks quite sustainable due to the availability of sufficient foreign exchange reserves, the ongoing reduction of leverage in the private sector, fiscal sustainability (compared with other countries – exporters of oil),” – said in the report.

As stated in the document, at present the global economy is influenced by two main factors – the continued normalization of monetary policy by leading Central banks, primarily Federal reserve system (the fed), and structural transformation of China’s economy with the attendant slowdown. In these circumstances, growth forecasts for the world economy remains moderate and the risks of instability in global financial markets more pronounced.

As previously stated the head of the Central Bank Elvira Nabiullina, the financial markets have already priced in an interest rate increase by the fed. Further developments will depend on further rate increases. The Bank of Russia does not exclude the increased volatility in the global markets after the fed action, which will put pressure mainly on emerging market currencies.

Following the decision by the fed rate is expected on January 27.