Russia & 2020 Oil Price Crash - Notes on Reserve Bank of India

1. The puzzle: Oil & gas made up roughly 65% of Russia's exports, yet Russia refused to cut production even as prices collapsed (Urals crude fell below $11/barrel), deliberately choosing to protect market share from US shale producers rather than increase the prices. 2. How did it afford this? The answer traces back to lessons from 2014. 1. 2014 crisis and the pivot to "macro-stability over growth" - After annexing Crimea, Russia faced US sanctions and had to spend dollars defending the rouble. This forced it to eventually let the rouble float freely. Paradoxically, this _helped_ the budget as a weaker rouble meant more roubles earned per dollar of oil sold. 2. Building a war chest - Russia used this windfall to run budget surpluses and build the National Wealth Fund (NWF) which was worth $125 billion by end of 2019. Any oil/gas revenue earned above $40/barrel got saved into this fund, not spent. Russia also raised oil taxes, hiked VAT, and cut pension outflows from the fund, all driven by fear of further sanctions. 1. Why the NWF specifically matters for oil price wars? Unlike ordinary FX reserves (used for import cover/currency defense), a sovereign wealth fund explicitly earmarked from oil surplus lets the government run a _fiscal_ deficit (spend more than tax revenue) even while oil prices crash, without needing to borrow abroad and this is what gave Russia room to sustain low prices without an immediate budget crisis. 3. Forced de-dollarization - Sanctions blocked Russian banks and oil companies from refinancing dollar loans, forcing them to repay and shift to local (rouble) financing instead. This structurally lowered Russia's dollar exposure, that is the external debt of Russia, as they turned to local financing. 3. A weaker rouble also lowered oil firms' production costs (since costs are in roubles, revenue in dollars). 4. The payoff by March 2020: - Reserves stood at $551 billion (as of March 20, 2020) - the 4th-highest in the world. - It has enough reserves to cover 24+ months of imports. - The reserves exceeded Russia's total foreign debt of $490 billion (end-Dec 2019). - 80% of public debt was held domestically, not owed to foreign creditors. - As external debt fell, Russia became debt-free *(combined)* on a net basis - its public debt was smaller than the government's own cash deposits at the Central Bank. - Moody's upgraded Russia to investment grade in February 2019. 5. Bottom line - Russia's 2020 oil price war wasn't reckless - it was supported by the six years of reserve-building triggered by the 2014 sanctions shock. This is one of the drawback *(for US)* of sanctions. ## References 1. Primary/official sources: - Ministry of Finance, Russia - [minfin.ru/en](https://www.minfin.ru/en) (NWF & Public Debt Management Policy, 2017–19) - Bank of Russia - [cbr.ru/eng](https://www.cbr.ru/eng) (External Sector data) - [Public Debt Management Policy of the Russian Federation, 2017–19](https://www.minfin.ru/common/upload/library/2017/08/main/2017-2019_Debt_Management_Strategy__Eng.pdf)) - Statement by Russia's Finance Minister - [Reuters](https://reut.rs/3e3dsOS) 2. Ratings & analysis: - Fitch Ratings - [Post-2015 reforms boost Russia's shock absorption capacity](https://www.fitchratings.com/research/sovereigns/post-2015-reforms-boost-russia-capacity-to-absorb-shocks-01-04-2020) - EIU Country Report - [Economic growth forecast](https://country.eiu.com/article.aspx?articleid=1229189106&Country=Russia&topic=Economy&subtopic=Forecast&subsubtopic=Economic+growth) - Russia Business Today - [NWF valuation](https://bit.ly/3a1abMY) 3. News coverage, by year: 1. 2020 (oil price war context): - Vox - [Saudi-Russia oil war explained](https://www.vox.com/2020/3/9/21171406/coronavirus-saudi-arabia-russia-oil-war-explained) - Al Jazeera - [Countdown to the Cost: oil price war](https://www.aljazeera.com/programmes/countingthecost/2020/03/saudi-arabia-oil-price-war-russia-200315114308947.html) - Carnegie Moscow - [Commentary](https://carnegie.ru/commentary/81321) - Energy Voice - [Russia's edge over Saudi Arabia](https://www.energyvoice.com/oilandgas/233530/russia-has-edge-over-saudi-arabia-in-crunch-oil-production-talks/) , [OPEC poker game](https://www.energyvoice.com/oilandgas/232648/opec-poker-game-on-monday-russia-holds-better-cards-than-saudi-arabia/) - Financial Times - [Article](https://www.ft.com/content/2fb09e5a-bc7b-49ee-acf5-0e290b75f2c3) - Oilprice.com - [Has Russia reached its limit?](https://oilprice.com/Geopolitics/International/Has-Russia-Reached-Its-Limit-In-The-Oil-Price-War.html) - BloombergQuint - [Putin losing his oil price gamble](https://www.bloombergquint.com/opinion/coronavirus-vladimir-putin-is-losing-his-big-oil-price-gamble) - IntelliNews - [Russia ready for prolonged oil shock](https://www.intellinews.com/crunching-the-numbers-russia-is-ready-for-prolonged-oil-shock-178367/) 2. 2019: - Al Jazeera - [NWF cuts dollar holdings](https://www.aljazeera.com/ajimpact/russian-national-wealth-fund-cut-dollars-sources-191107130055275.html) - Moscow Times - [Russia's net public debt falls to zero](https://www.themoscowtimes.com/2019/09/11/russias-net-public-debt-falls-to-zero-a67238) (×2 refs) - NYT - [Russia's economy](https://www.nytimes.com/2019/02/06/business/russia-economy.html) 3. 2017: - Reuters - [Rouble drop justified by oil, sanctions](https://www.reuters.com/article/uk-russia-markets/rouble-drop-justified-by-oil-sanctions-russia-central-bank-analyst-says-idUSKBN19C222) 4. 2015: - Russia Direct - [Why a free-floating rouble isn't a freefall](https://russia-direct.org/analysis/why-free-floating-ruble-not-freefall 5. 2014 - DW - [Rouble allowed to float freely](https://www.dw.com/en/russian-ruble-allowed-to-float-freely/a-18051582) - Reuters - [Russia wary of US sanctions, saves before growth](https://www.reuters.com/article/us-russia-economy-budget-analysis/russia-wary-of-us-sanctions-puts-saving-before-growth-idUSKCN1N51B9) (×2 refs) - FT - [Article](https://www.ft.com/content/4009472c-620e-11ea-b3f3-fe4680ea68b5) - Reuters - [Central bank widens rouble corridor](https://www.reuters.com/article/us-russia-cenbank-rouble/russian-central-bank-moves-closer-to-free-float-by-widening-rouble-corridor-idUSKBN0GI0EE20140818)