However oil at 80 will lead to a 02percent decline

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Unformatted text preview: ussian deficit Kommersant, 2012, Russia’s Rating Vulnerable to Oil Price, May Tumble To 2000s Level, A sustained fall in the oil price could lead to a surge in deficit and government debt as well as a cut in Russia’s sovereign rating by up to three notches, Standard & Poor's Ratings Services said in a report. The report, Hooked on Oil: Russia’s Vulnerability to Oil Prices, examines Russia’s key economic indicators in two stress scenarios: one where the oil price drops to an annual average of $80 per barrel over a sustained period, and the other where the oil price drops to $60. Although the agency considers the likelihood of these two scenarios materializing over the next two years to be less than 30 percent, a fall in oil prices will damage the Russian economy and living standards in any case. Russia’s dependence on oil has been growing in recent years, as the non-oil-and-gas deficit rose from 4.8 percent of GDP in 2008 to 9.4 percent in 2011. The growing government spending has been largely financed by the oil and gas export revenues, which in turn depend on the global oil price. According to S&P experts, a $10 cut in oil prices sends Russia’s revenues down by 1.4 percent of GDP. If oil stands at $100 per barrel, the price Russia’s 2012 budget is based on, Russia will see only a modest 3.5 percent growth and a 2 percent deficit in 2013 and 2014, offset by an equal increase in reserve funds. However, oil at $80 will lead to a 0.2percent decline and a 4.4 percent deficit with a fast recovery to a 3.3 percent growth and 2.8 percent deficit in 2014. Net debt will also grow. The worst-case scenario, based on oil at $60, will lead to a severe recession. In that case Russia’s economy will contract by 5.3 percent of GDP in 2012. Although it may recover almost as rapidly as in the previous scenario, the federal budget deficit will surge to 8.2 percent this year and then gradually decrease to 5.9 percent in 2015, while the government debt will grow proportionately by 3.5 percent, 9.4 percent and 13.4 percent of GDP in 20122014. Russians’ incomes will shrink 20 percent, and will not regain their previous level even by 2014. The government will find it more difficult to alleviate the repercussions of this new crisis than in 2008: its spending obligations have grown while its safety cushion is smaller this time around. The Reserve Fund contained $62.4 billion as of March 1, 2012, down from $142.6 billion in September 2008. Borrowed resources may not be easily available, given the sharp rise in the country’s sovereign debt, S&P warns. The rating service believes Russia’s investment rating of ВВВ/Stable is most likely to be downgraded by one notch. In a stress scenario, Russia’s rating will lose three notches or more, especially if the economic slump also leads to a flight of foreign capital. 145 Last printed 9/4/2009 7:00:00 PM Oil DDW 2012 1 High oil prices mean more cash flowing into the Russian government Kenneth Rapoza,...
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This note was uploaded on 01/30/2013 for the course ECON 101 taught by Professor Burke during the Spring '13 term at Southern Arkansas University.

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