October 1, 2014 / 8:38 AM / 5 years ago

UPDATE 3-Russian central bank prepares strategy for sharp oil price drop

* Central bank mulls possibility of oil price falling to $60

* Price fall would undermine budget and rouble

* Analysts say scenario unlikely but warn of risks

* IMF halves 2015 growth forecast to 0.5 pct (Changes sourcing, adds comment)

By Lidia Kelly and Darya Korsunskaya

MOSCOW, Oct 1 (Reuters) - Russia’s central bank said on Wednesday it is working on measures to support the economy should oil prices fall by as much as a third or more, showing growing concern as the rouble slides and Western sanctions take a toll.

Punitive measures by the West over Moscow’s role in the Ukrainian crisis have pushed the economy of President Vladimir Putin’s Russia towards stagnation. The International Monetary Fund halved its growth forecast for 2015 to just 0.5 percent. The World Bank estimates the economy will expand next year by only 0.3 percent.

The Central Bank told Reuters it is developing a “stress scenario” that envisages a drop in the oil price down to $60 per barrel.

This would be added to three existing scenarios for the central bank’s policy outlook for the next three years, and compares with a $100 assumption in the 2015-17 state budget adopted last week.

“The Bank of Russia is developing a stress scenario with a significant deterioration in the external economic environment compared to its (current most pessimistic scenario),” the bank said in an email statement.

“In the stress scenario, it is proposed to assume even a more pronounced deterioration in the price of oil, up to the level of $60 per barrel.”

The bank’s current most sober outlook envisages oil falling to $86.5 per barrel by 2017. Its base scenario assumes the oil price will be above $100 per barrel for the next three years. Even then, it predicts only modest economic growth.

Oil and gas produce about a half of Russia’s federal government revenues. Already the price of Urals URL-E, Russia’s chief crude blend, has fallen to around $92, while companies are struggling to raise capital due to Western sanctions imposed over Russia’s actions in Ukraine.

The IMF’s mission head to Russia, Antonio Spilimbergo, said the uncertainty about international tensions present downside risks to the IMF’s already lowered growth forecast.

“There are considerable risks and the risks are related to the continuation or worsening of the geopolitical situation,” he said. “Uncertainty makes investors very reluctant to invest in Russia.”

Commenting on the bank’s new stress scenario, Finance Minister Anton Siluanov said that his ministry didn’t plan to adjust its own projections used for budget planning, which he said factored in a possible oil price as low as $80 per barrel.

“The forecast of the central bank somewhat differs from that of the government. There is nothing terrible about the fact that they consider a wider range of possible changes in price parameters,” he said. “I consider ($60 oil) unlikely.”

While playing down the likelihood that oil would fall so sharply, Siluanov has also warned repeatedly that a lower oil price is one of the biggest risks that the economy faces, requiring budgetary prudence.

The central bank told Reuters that there is an “ongoing discussion” about its draft, but the scenario will be included in the bank’s final version of its 2015-2017 monetary policy.

Timothy Ash, head emerging markets strategist at Standard Bank in London, said the Russian economy would be in serious trouble if crude fell to $60. This would lead to “deep recession, large current account and fiscal deficits, huge levels of capital flight, and significant stress on banks”, he said.


Alexei Kudrin, a former finance minister and influential figure in the Russian political elite, said recently that he foresees crude prices continuing to decline over the years ahead because of new oil production technologies.

In three to four years, he predicted, declining revenues from oil taxes would create a $30-40 billion hole in Russia’s government finances.

Some other analysts are also worried that the official economic projections take too little account of the risk that oil prices could fall significantly.

“It’s prudent policy making. I think it’s sensible to consider a sharp fall in oil prices,” said Neil Shearing, chief emerging markets economist at Capital Economics in London.

Were prices to fall to $60 per barrel next year and stay there, the budget deficit would widen to 4.5 pct of gross domestic product, he calculated - a huge burden given Russia’s limited access to international capital markets.

That contrasts with official projections, based on oil around $100 per barrel, that see the deficit at 0.5-0.6 percent of GDP in 2015-17.

An added headache for Russia would be the negative shock to its balance of payments. “One thing that would happen is the rouble would fall sharply,” Shearing said.

“We would start to see the central bank consider more of the non-standard measures to try to defend the currency. Capital controls may well come into place... The bigger the dislocation in markets, the more chance there is of more draconian and drastic responses from the central bank.”

Macro-Advisory analyst Chris Weafer said in a note that the talk of emergency measures such as capital controls did not indicate any fundamental shift in policies. Such contingency planning was normal good business practice and “does not indicate that the central bank, or the Kremlin, has changed its position”, he said.

Were oil to fall below $75 per barrel, the central bank could be inclined to back-track on its plans to float the rouble next year, he said, but added that this scenario was unlikely. “The main OPEC countries would experience budget difficulties long before that and would have to take action to cut supply,” he said.

A sharp drop in oil prices may, however, complicate Putin’s plans.

“I am not forecasting a collapse in the government in the next 12-18 months and it’s more likely than not that (Putin) will get reelected in four years time,” Shearing, of Capital Economic said.

“But nothing is forever and a period of much lower oil prices and the economic pain they would afflict would have big political consequences in the end.” (Additional reporting by Jason Bush; Writing by Lidia Kelly and Jason Bush; Editing by David Stamp and Peter Graff)

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