Brent oil: How high oil prices save Russia from financial collapse

(BFM Bourse) – Russia just posted a historic current account surplus thanks to high energy prices. This record balance also reveals the Russian economy’s Achilles heel: its heavy dependence on exports, especially to Europe – a customer that is not easy to replace, credit rating agency Scope details.

Unheard of since the end of the Soviet era: Russia’s current account surplus jumped to $58.2 billion in the first quarter, a historic amount equal to about 10% of the foreign exchange reserves of the Central Bank of the Russian Federation ($609 billion as of April 8, before deducting the sanctioned quota or freezing procedures).

This massive current account surplus (the broad aggregate of cash flows, which includes the trade balance, services balance, current transfers, and those of income) reflects the large increase in receipts the country derives from its oil and gas exports. So far, they have largely escaped Western sanctions.

In the absence of an extension of European energy sanctions, the Russian current account will be more than 200 billion dollars this year (compared to 120 billion dollars in 2021) taking into account the collapse of imports on the one hand and, on the other hand, an increase in the value of hydrocarbon exports. It is enough to allow the central bank to replenish a large part of the reserves frozen due to sanctions. Russia should quickly “de-dollarize” its reserves and trade relations by increasing its exposure to the Chinese yuan. However, its exposure to the euro should remain (in fact, about half of its exports to China are settled in euros)

However, analyst Levon Kamarian stresses, that the full impact of the sanctions already imposed (before any form of energy embargo) and the repercussions of the conflict in Ukraine on foreign trade and the internal market are yet to be realized. The sanctions imposed at this stage are painfully affecting the private sector, with more than half of the high-tech equipment usually imported, as well as a large part of the imports of machinery and equipment needed to operate local factories, idling. Withdrawing access to foreign technologies should weaken the growth potential of the Russian economy, which Scope estimated at a moderate level already before the invasion of Ukraine (in the range of +1.5 to +2%), given that at least a contraction of 10% is now expected for this year.

Infrastructure problem

Moreover, Europe is accelerating its efforts to diversify its energy supply, which will exacerbate the challenges facing the Russian economy due to the lack of strong measures to reduce structural dependence on energy exports. As Scope reminds us, Europe today is the main outlet for Russian oil and gas, with a $100 billion bill in 2021. The European goal of freeing itself from Russia by 2030 (Germany is now aiming for a significant reduction by 2024) could be accelerated by Increased imports of liquefied natural gas (LNG) in particular.

At the same time, Russia will try to counter European actions by seeking to deepen its relations with China. But replacing one customer with another completely won’t happen overnight. At the moment, Russia simply does not have the infrastructure to redirect its exports from west to east. The country has eight pipelines that ship about 220 billion cubic meters annually to Europe. This is almost six times the capacity of the only pipeline – Power of Siberia – currently connected to China, which will not reach its full capacity for several years (the flowchart of 38 billion cubic meters per year by 2025). Russia is considering building a second plant, Power of Siberia 2, which can produce up to 50 billion cubic meters per year, but this project is unlikely to be completed before 2030.

Guillaume Beyer – © 2022 BFM Bourse

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