A Russian ruble with the spires of the Kremlin in the background. As Russia's war on Ukraine continues, default rates are likely to rise. Photo: AFP

It was a “Black Monday” for Russia as the country woke to find the ruble down to four-year lows following a 25% crash in global oil prices – their biggest fall in the century. 

The downward spiral in oil prices is the direct result of Russia failing to reach an agreement with OPEC, the organization of top oil exporters informally led by Saudi Arabia, with which Moscow has been cooperating in the OPEC+ framework. 

In Vienna last Friday, Moscow rejected a Saudi proposal to reduce oil production by 1.5 million barrels per day in addition to the 1.7 million barrel per day cut already in place, in the face of falling global demand amidst the novel coronavirus outbreak. 

As Moscow rejected the deal, Saudi Arabia announced it would lower oil prices and increase production as soon as the current deal expires on April 1. 

The announcement marked the breakup of the Russia-Saudi Arabia alliance, which had propped up oil prices for the past three years, and the start of a price war.

The consequences are difficult to predict.  

When markets opened on Monday, benchmark Brent crude fell by more than 30% to US$31 per barrel, the sharpest decline since the end of the Gulf War in 1991. As a direct result, the ruble, tightly dependent on oil prices, plunged to four-year lows against the US dollar.

Tuesday may prove less bloody. At midday Tuesday, Asia-time, Brent had recovered to $36 per barrel.

Global markets registered heavy losses following the oil price crash, but it was major Russian companies that were hit the hardest. Russian state banks VTB and Sberbank plunged by 20% on European markets on Monday, while energy giants Rosneft and Gazprom fell by 22.5% and 15.4% respectively. 

Russia’s rationale

Despite the shock fall in oil prices, Russian officials remain confident that stepping away from the OPEC deal was a wise decision and largely blame their OPEC partner for refusing to reach a compromise. 

According to an official statement, the Russian side offered to preserve the production cuts already in place until the second half of 2020 “in order to better understand the impact of the coronavirus on the global economy and oil demand.” However, the statement continues, “our OPEC partners decided to increase oil production and start a fight for market share.” 

Russia’s move has been widely interpreted as a calculated measure to prevent US shale-oil producers seizing a larger global market share. 

“The US and other non-OPEC+ countries are ready to increase production. That is why the deal did not make sense from the point of view of Russia’s interests,” said Mikhail Leontiev, spokesperson at Russian state oil giant Rosneft.

Rosneft, controlling 40% of Russia’s oil, has long been a vocal opponent of the OPEC+ production cut.  

According to Russian news media The Bell, Rosneft CEO Igor Sechin, a close associate of Russian President Vladimir Putin, has been personally lobbying for Russia’s withdrawal from the OPEC+ deal in order to strike a blow at US shale companies. 

According to Sechin, prices lower than $40 per barrel won’t be sustainable for US shale producers, but Rosneft can afford to produce at that price point. 

As reported by Bloomberg, Rosneft announced it would boost oil production by 300,000 barrels a day as soon as the current OPEC+deal expires on April 1. 

Russia is ready

Russia has initiated the fight, suggesting that the Kremlin has done the necessary calculations. And many agree that Putin’s conservative economic policies in the last few years have prepared Russia well for an oil price downturn. 

In 2014 and 2016, oil issues led to declines in the Russian ruble and Russian stock markets that brought about decreased production and income nationwide. But today the country looks better positioned. Much governmental income is in dollars, which means a devaluation of the ruble is advantageous, while significant chunks of budgetary expenditures are ruble-based.

Russia’s inflation rate is at a historic low, meaning the Central Bank might welcome a rise to 3.5-4%.

While Sechin is confident he can undercut the American shale players, according to some analysts, Russia also holds the upper hand in the price war with Saudi Arabia.

The key Russian fiscal break even – the oil price needed to keep the state budget balanced – is $40 per barrel, which is half that of the Saudis, at $80 per barrel. According to this analysis, Moscow will be more resilient than Riyadh when it comes to low oil prices, meaning the Saudis will have to return to the bargaining table.

Russian officials were confident in the aftermath of the oil price crash. 

Russia’s Energy Minister Alexander Novak announced that the current situation in the oil markets reflects the ministry’s forecasts. “The Russian oil industry has the quality resource base and enough financial safety margin to stay competitive at any predicted price level,” he said. 

The International Energy Agency expects oil demand to rebound to a normal level in the second half of 2020 – well within Russia’s comfort zone.

According to Russia’s Finance Ministry, foreign currency reserves amassed in the National Wealth Fund, which amount to about $150 billion – or 9.2% of Russian GDP – will be enough to cover a budget deficit if oil prices fall to $25-$30 per barrel for a hefty 6-10 year period. 

Meanwhile, the Russian Central Bank announced it would halt foreign currency purchases on local markets as a measure to reduce the downward pressure on the ruble. 


Other experts are less bullish, arguing that none of these measures are sufficient to compensate for a prolonged recession in oil prices. 

“The National Wealth Fund will be able to cover the budget deficit only for three years,” said Oleg Vyugin, professor at the High School of Economics in Moscow, as reported by the BBC. According to the expert, if oil prices remain at $30 until the end of 2020, Russia’s economy will face a recession. 

A similarly critical opinion is held by Dmitry Marchenko, lead analyst for oil and gas at credit ratings agency Fitch. He told Russian business newspaper Vedomosti  that Russia’s decision to blow the OPEC agreement was “a big mistake.” According to Marchenko, the positive effects of growth in oil export volumes “will dissolve in the face of falling prices.” 

And the oil market is facing a black swan, the ramifications of which are almost impossible to predict. 

Most analysts agree that the performance of the Russian oil industry – and its overall economy in the near future – will largely depend upon what impact the Covid-19 epidemic has upon global markets. 

Most critical is Russia’s leading global partner, China, the country hardest hit by the virus. According to the International Energy Agency, global demand for oil will fall in 2020, mainly due to the impact of the virus on the Chinese market, the world’s largest oil importer.  

And there are worse-case scenarios. As reported by Bloomberg analysts, if world governments fail to reign in the coronavirus crisis, Russia risks shaving 4.8% off its GDP in the space of a year, hurling its economy into a deep recession.