Putin’s government rewriting budgets for $20 oil in 2020

Evgenia Pismennaya and Anya Andrianova 4/3/2020

MOSCOW (Bloomberg) --President Vladimir Putin’s government is rewriting its budget to prepare for oil prices at $20 a barrel this year despite U.S.-led efforts to get major producers to rein in production.

To cope with lower budget revenues, the Russia will ramp up borrowing by about 1 trillion-1.5 trillion rubles ($13 billion-19 billion) this year, according to people familiar with discussions who asked not to be named because talks are ongoing. The Finance Ministry estimates the budget shortfall will total 3 trillion-4 trillion rubles this year, the people said.

Putin has been keen to show that the economy of the world’s biggest energy exporter can cope with the 50% plunge in oil prices this year even as other oil producers struggle. President Donald Trump called for a coordinated production cut late Thursday, prompting attempts by the OPEC+ coalition to to pull together a meeting of its members.

Shock Resistant. The budget proposals were likely in the works long before Trump’s latest push as Russia’s policy makers adapt to the new conditions. A nationwide shutdown starting this week is adding an extra strain on the economy, prompting calls for increased spending.

“If the forecasts of a 15-20 million barrel reduction in demand turn out to be right, then no production cut will help raise oil prices,” said Kirill Tremasov, head of research at Loko-Invest in Moscow and a former Economy Ministry official. “The Russian government is doing the right thing, preparing for difficult times and a low oil prices. There are no other options,”

The Finance Ministry didn’t respond to a request for comment.

Urals crude, Russia’s export blend, touched $11 a barrel earlier this week, before a market rebound following Trump’s comments. Average oil prices below $20 a barrel could equate to a budget deficit of 2% of gross domestic product this year, according to Citigroup Inc.

Analysts were skeptical that the Finance Ministry will be able to raise so much money in bond sales this year as foreigners exit the market due to a plunge in the ruble. Foreigners pulled 278 billion rubles from ruble government bonds in March, the biggest monthly outflow on record, according to analysts at Promsvyazbank in Moscow.

The Finance Ministry put its weekly bond auctions on hold at the start of March and it’s not yet clear when sales will start back up again, one of the people said.

“The borrowing plan could spook the market,” said Olga Sterina, head of fixed income research at Uralsib in Moscow. Given the absence of foreign investors “it seems unrealistic to try to sell 900 billion rubles of bonds a quarter.”

Poor Performance. Yields on 10-year government OFZ notes were trading down 2 basis points at 6.9% on Friday. The ruble climbed 0.5% to 76.89 versus the dollar.

The Finance Ministry will continue using its $123.1 billion wealth fund to cover missing energy revenue in the budget, according to the people familiar with the discussions. The ministry has been selling foreign currency to support the ruble since last month.

A government forecast being discussed last month estimated a 5%-10% contraction in the Russian economy this year in the “worst-case scenario” of a short lockdown. Those projections are now being reassessed after the nationwide shutdown was extended Thursday through the end of April.

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