Oil gives Russia another chance

Russia is reaping the benefits of last year's victory in the price war with the US and Saudi Arabia
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12 3 2021

On March 4, a OPEC+ meeting was held. The decisions that were made during the meeting are completely acceptable to Russia. Our country has received a double benefit: both from the increase in the physical volume of oil production, and from the growth of stock prices.

Russia was allowed to increase oil production from April by 130,000 barrels per day (b/d). Thus, in the first four months of this year, the production of "black gold" in our country will grow by a total of 385,000 b/d. Of course, this is not the largest volume, but it is completely "export". Accordingly, Russia will receive a good increase in export revenue.

It is noteworthy that only Russia was allowed to increase production under the OPEC+ deal (if not counting Kazakhstan's +20,000 b/d). The rest of the countries retained the previous restrictions. All this spurred oil prices up, which approached the level of $70 per barrel of Brent. The Russian Urals variety is currently trading at a slight discount of $0.5-$1 from Brent, depending on the direction of delivery.

Such circumstances allow Russia to count on the resumption of a large-scale inflow of petrodollars. At current production volumes, the real cut-off price for the budget rule is about $48-50 per barrel. This allows to generate a good amount of excess income.

Billions of petrodollars

Already in the first months of 2021 (January-February), excess revenues from oil and gas exports amounted to 154 billion rubles. At the same time, in just one month of March, approximately the same figure is projected – 148 billion rubles.

However, it should also be taken into account that domestic fuel consumption in winter in Russia is traditionally higher. Accordingly, the closer to the summer, the more our country will be able to export. The consequences of the corona-crisis have already ceased to have a significant impact on domestic fuel consumption – business activity has fully recovered, and consumption volumes are already exceeding the pre-crisis levels.

The only exception is the airline industry, but it has a small share in the oil products market. Thus, starting from April, we can expect the inflow of oil super-profits at the level of at least 200 billion rubles per month.

This is a lot of money, which on paper is a potential state investment. Now the main task that the government faces is to find promising projects for the development of the real sector of the economy. The liquid part of the National Welfare Fund (NWF) has long exceeded the required level of 7%. Every month this figure will only grow.

For the first time in a long time, our country has sufficient funds for state investments. The problem lies elsewhere – the quality of the study of investment projects. Unfortunately, there are not many of them.

One of the most striking examples is the construction of the M12 highway (Moscow-Kazan) with a total cost of 700 billion rubles. From this, 150 billion will come from the oil money of the National Welfare Fund. The financing will be based on the model of Avtodor's placement of long-term bonds for 20-25 years. This is exactly the kind of cheap and long-term money that is so necessary for the Russian economy.

Necessary modernisation

However, the government is well aware of the fact that Russia has another chance to make an economic breakthrough on the basis of resources derived from expensive oil. Literally at every meeting the president participates in, Vladimir Putin gives instructions to work out the financing of a particular project at the expense of the NWF.

This was the case at a meeting on the development of the gas chemical and coal industries. In the first case, we are talking about the support of petrochemical industries, whose products will be exported, in the second – about the construction of transport infrastructure for the export of coal from Yakutia.

Nevertheless, there are so many expected oil windfalls that it is necessary not just to work out point projects, but also to deal with strategic areas. These may include, among other things, operations on the stock market. Of course, the real sector of the economy is more important for the development of the country, but the stock market is becoming a reality today. Competent work on it will allow to attract additional resources for the real sector of the economy.

Such areas include the purchase of foreign assets. For example, parts of airline shares traded on the stock exchange. This will allow us to influence the policy of carriers in order to promote domestic aircraft in foreign markets. Fortunately, our aviation industry has finally become capable of producing high-quality planes.

The external macroeconomic environment, in particular, the oil market, once again provides a chance for Russia to make a qualitative breakthrough, intensively developing non-oil sectors of the economy. In the previous times, this was not possible. However, at the moment, there is confidence that the government is more aware of this problem and intends to make every effort to achieve its goals.

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