FX.co ★ Russia keeps budget bet on low oil prices

Russia’s Prime Minister Dmitry Medvedev urged the government not to rely on high commodity prices. Finance Minister Anton Siluanov echoed the Premier and confirmed the official assumption that oil will average $40 a barrel in the next three years. So the budget will not be revised after OPEC reached a tentative agreement in September on its first production cut in eight years. The price of Russia’s main export blend Urals used to calculate the country’s budget “was and remains” at $40 a barrel, he said.

Dmitry Medvedev stated it does not make sense to expect previous high prices for crude oil. With current prices holding at about 50% of 2014 levels, the Prime Minister said a sustainable economy can no longer depend on commodity sales. Crude oil and natural gas exports still account for the bulk of fiscal revenues. So the Premier declared the new government stance on economic priorities. Interestingly, 16 years had passed before the government realized its backward strategy. The International Monetary Fund conducted a survey on the recent developments in Russia’s economy. "The Russian economy will need to adjust to the challenge of persistently lower oil prices by reducing its dependence on oil and energy exports over the medium term," an IMF board assessment reads. The Kremlin acknowledged the underlying reasons behind recession are international isolation and the Western economic sanctions. Citing Russia’s Premier, two major causes exposed and worsened structural problems of the Russian economy. On the one hand, it is the global crisis. On the other hand, the model of economic growth in 2000s has exhausted itself.

This year, the state budget has been running its widest deficit since 2010. An IMF assessment found the Russian economy contracted by 3.7% last year. The economy remains in recession this year before growth resumes at an estimated 1% next year.