Climate

Dropping Oil Prices And Sanctions Are Hurting Russia To The Tune Of $140 Billion

CREDIT: AP Photo/Alexei Druzhinin, Pool

Russian Prime Minister Vladimir Putin takes part in the opening ceremony for the Russian section of the Russia-China oil pipeline in Russia's Far Eastern region of Amur, Sunday, Aug. 29, 2010.

Russian Finance Minister Anton Siluanov said that Russia could expect to lose between $90 and $100 billion a year from the global drop in oil prices, and $40 billion from the sanctions imposed by the United States and the European Union.

“We’re losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent,” Siluanov told reporters assembled at a news conference on Monday. And some economists peg those numbers as conservative, due to the weakness of Russia’s currency, the rouble, and how costly it actually is for companies banned from borrowing outside of Russia.

“The main issue that affects the budget and economy and financial system, this is the price of oil and the fall in monetary flows from the sale of energy resources,” the finance minister continued.

The sanctions, which began in response to Moscow’s intervention in eastern Ukraine and following its annexation of the Crimean peninsula in March, started by limiting borrowing abroad by Russian companies and banks. In September, they were extended to U.S. firms using goods or services “in support of exploration or production for deepwater, Arctic offshore, or shale projects that have the potential to produce oil in the Russian Federation.”

In June, you could sell a barrel of oil on the global market for $115, whereas the price nowadays is below $80. Wall Street predicts next year the price will drop to around $75 a barrel. Russia’s budget planners assume a $100 price, and because so much government revenue comes from taxing oil companies, the added pressure from sanctions keeping banks from borrowing abroad puts them in a major bind.

Reuters estimates that the Russian GDP should be about $1.9 to $2 trillion this year, so a loss of $140 billion would be about seven percent of Russia’s economy. The brisk and profitable sale of petroleum and petroleum products is massively important to the Russian economy. Estimates from the Energy Information Administration peg the sale of oil and natural gas to be about 68 percent of total Russian exports in 2013.

Last month, Siluanov warned that his country could not afford one of President Vladimir Putin’s pet projects, a multi-billion-dollar overhaul of the Russian military.

In an interview over the weekend, Putin suggested that Saudi Arabia and the United States were trying to weaken the Russian economy by churning out a lot more oil than demand required, dropping the global price. He also suggested that the Saudis were trying to keep supply high enough that American shale oil would become uneconomical to produce. The U.S. shale boom has added to strong Saudi production to keep world supply high. All the while, demand has not grown as it has historically, partially due to efficiency and economic slowdowns in Japan and Europe.

Ahead of a big OPEC meeting on Thursday in Vienna, Reuters reported that while Saudi Arabia has enough currency reserves for a year of prices at $70-$80 a barrel, non-OPEC-member Russia would try to convince fellow producer nations to cut supply to support prices. This is a bit awkward since Russia did not follow through with an agreement during the last decade to boost and cut output in tandem with OPEC, instead increasing exports without cooperation with the cartel.

The sanctions on the Russian oil sector did not just hit Russia’s coffers, it also effectively pulled ExxonMobil and BP out of drilling in the thawing Russian Arctic. Historically, Russia’s oil sector has depended on Western oil technology and skill. Yet after sanctions largely put a stop to that, Igor Sechin, president of Rosneft, Russia’s state-controlled oil company, said Rosneft would continue on its own. “We’ll continue drilling here next year and the years after that,” he said. Though Russia pledged to continue, the low global oil prices make such risky, expensive, and dangerous work all the more uneconomical.

What does this mean for the United States, beyond the fact that economic sanctions on Russia appear to be more effective when targeted at its top industry? Michael Levi, senior fellow at the Council on Foreign Relations, explained in October that increasing production can act as an economic stimulus as fuel and gas prices drop, allowing consumers to spend more on other things. While this helps the employment rate in consumer states, it hurts it in producer states, like North Dakota and Texas.

Not to mention the fact that continuing to burn oil and other fossil fuels at the current rate is not feasible if the planet has any hope of staying under 2°C of global warming, the level most scientists have set as the limit we can adapt to without suffering truly catastrophic consequences.