Oil Crash Shrinks Russian GDP, Energy Minister Blames Saudis

“The risk of a deeper decline has intensified.”

By Andy Tully, Oilprice.com:

Russia’s oil-dependent economy appears headed for a second year of recession, and Energy Minister Alexander Novak says the blame falls squarely on the Saudis.

The Russian gross domestic product fell by 4 percent in November from its level in the same month in 2014, and had shrunk 3.7 percent in October from its levels a year earlier, the Economy Ministry reported Monday.

The reason, to no one’s surprise, is the plunge in oil prices over the past 18 months. The global average value of a barrel of oil has crashed from over $110 per barrel in the summer of 2014 to just below $40 per barrel today.

Because Russia’s government relies on oil production for half its revenues, it’s preparing for a 3 percent deficit in the budget for the coming 2016 fiscal year. Making matters worse, profits in any industry related to oil are down so far that it appears its current recession may last as long as two years.

“The risk of a deeper decline has intensified,” Andrei Klepach, chief economist at Russian state development lender Vnesheconombank and a former deputy economy minister, wrote in a report. He added that both bad economic and political news for Russia will contribute to “a stable negative trend, forcing downgrades in forecasts for next year.”

The bad political news includes the Western sanctions imposed on Russia since 2014 because of Moscow’s involvement in the conflict in neighboring Ukraine. This also is bad economic news for Russia, but trumping that is weak price of oil, and Moscow blames that entirely on Saudi Arabia.

Oil prices began falling in June 2014 in large part because of increased production in North America and Russia, which created more supply than demand could consume. Yet five months into oil’s nosedive, at its ministerial meeting in Vienna, OPEC, led by Saudi Oil Minister Ali al-Naimi, decided not to cut production to shore up prices but to maintain its ceiling of 30 million barrels per day.

Al-Naimi said his aim was to keep prices low in a price war with drillers in the United States, who were relying on relatively expensive hydraulic fracturing to extract oil, and in Russia, who can’t help shore up the price of oil by limiting production because the climate in most of its oil country is so cold that stopping production at some wells would freeze them up.



At its latest meeting, on Dec. 4, OPEC effectively dispensed with its production ceiling altogether, putting more downward pressure on oil prices, and on Russia’s economy. And this has rankled Novak.

“This year Saudi Arabia has ramped up production by 1.5 million barrels per day, which in fact destabilized the situation on the market,” the energy minister said Monday in an interview with the state-owned broadcaster Rossiya 24.

Add to this, Novak said, is Iran’s return to the market, probably in early 2016, once the West lifts sanctions it imposed because of Tehran’s nuclear program. Throughout much of 2015 Iran has been urging OPEC, without success, to make room for its return to the market.

Still, there is some hope that oil prices will stabilize sometime in 2016. In its annual World Oil Outlook, issued Dec. 23, OPEC said it expected “a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market.”

Novak, possibly referring to the OPEC forecast, also expressed optimism, saying, “According to experts’ estimates, demand-and-supply curves may coincide in the second half of 2016, which will balance the market.”

Arkady Dvorkovich, Russia’s deputy prime minister, agreed, saying low prices eventually could become the agent of their stabilization. “For some time, any company, any producing country is able to sustain such low prices,” he told Rossiya 24. “But then investment will inevitably go down, which means that production will fall and prices will rise.” By Andy Tully, Oilprice.com

What might be some of the moves in energy that would push markets and policy debates in unexpected directions? Read… 5 Possible Market-Moving Surprises In Energy For 2016




Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.



  8 comments for “Oil Crash Shrinks Russian GDP, Energy Minister Blames Saudis

  1. Nick says:

    I think it’s funny that people say ‘stabilize’ when they really mean ‘go up’.

    Regardless of whether oil prices stabilize, it’s going to be interesting to see how investment proceeds, given that any business plan now has to include the caveat ‘economic viability depends upon the Saudi king voluntarily limiting production’.

    At least in Alberta . . . Happy New Year!

  2. Jeff says:

    “a gradual improvement in market conditions as growing demand and slower than previously expected non-OPEC supply growth eliminate the existing oversupply and lead to a more balanced market.”

    And what is going to fuel this “growing demand”?? More cheap debt…. is that even possible? Majority of people are flat broke! If they cant obtain easy credit I have a feeling this tidal wave of deflation and contraction will continue for quite some time, that is, if the CB cabals don’t step in and “save the day”.

    I think it is safe to say that the Mal-investment glut in China is coming to an end, so what force is going to fill that “demand” void? Unless they find a way to stuff every god damn Chinese citizen behind the wheel of a car, demand in China is going to decline. Maybe we can start to undertake the long overdue re-investment in Americas infrastructure? But how to fund such a project? Plus, investment in America doesn’t seem to be on the Global Elites agenda, now the destruction of America, that is good business it would appear!

    Supply side economic thinking…. twits!

  3. ejhr2015 says:

    I don’t see why Russia has to compete in this race to the bottom? It has enormous natural capital and while exports are useful in calculating the country’s accounts, they don’t have to slash the economy or the standard of living.
    They are well placed to use stimulus to supply the economy with the currency it needs to run its affairs. The limit is simply the output gap, the difference between the current recession and the optimal economy with full employment. That would be $trillions of fiscal space.

    Funny there is so much knowledge out there, but no understanding.

    • nick kelly says:

      Exports are useful in calculating accounts…

      Uh ya- like a stores sales are useful in calculating accounts, and in paying bills.
      I don’t know where you get the idea that Russia is self-sufficient in almost anything ( cabbage, vodka?)
      Incredibly, it isn’t self sufficient in oil and gas field equipment- most production is from Soviet- era wells.
      There isn’t a single Russian consumer product that can meet the market.
      Ironically, the only hope for this economy- smaller than Canada’s but supporting 4 times as many people, is integration with the EU.
      I have to admit however that some dissent is permitted because both the head of the central bank and Kudrin, the former minister of finance, say the country is in crisis, with the former saying painful reforms can’t be delayed

      • John Doyle says:

        I’m not saying its house is in order. But I am saying it doesn’t have to slash necessary funding for services that Neo liberal governments are doing everywhere else. No matter how painful the reforms have to be, a neoliberal approach is unnecessary, unwise and unhelpful and will fail.

        The next thing to remember is that taxation does not fund government spending in a monetary sovereign nation. All we need to have is equitable taxation, not necessarily in the amounts needed for a “balanced” budget

  4. Ptb says:

    Has anyone done a demand side analysis? It seems obvious that producer need money badly enough to increase production into falling prices. But what about demand levels?

  5. Aussie Gold says:

    Oil Contract Settlement , The Elephant in the room.

    The question I never hear raised is” how much financial damage will this do to the USA”.
    Fact 1. Most or nearly all oil contracts are settled in US dollars.
    Fact 2. In the last 12 months the price of oil has fallen from $115 to under $40
    Conclusion.
    The demand in total dollars per year to settle all oil contracts will correspondingly be approx 1/3 what it was based on price ……. , that’s without factoring in the decreasing demand for oil itself as world growth continues to slow. This should effect the velocity of money and create more deflationary pressure which will increase the amount of coming money printing that the USA intends to do to inflate collapsing bubbles.

    • RandyDan says:

      Obviously, the crash in oil prices effects virtually every nook and cranny of the world economy and the economies of every country . . . each differently. The world economy (and all it’s individual pieces) are going to see a LOT less money flowing through their hands. That can’t bode well for the world as a whole nor the individual states who are pretty much all negatively impacted by the huge loss of velocity. One might think that due to the fantastic over-extension of credit coupled with the potential for bursting bubbles, it’s time to sell? Like EVERYTHING? And buy millions of half-pints of vodka. That will always hold it’s value and is easily bartered.

Comments are closed.