Russia says can cope with $25-$30/b oil as ruble hits 4-year low

The Russian government Monday said the domestic economy could withstand oil prices falling to $25-$30/b and that Russia would maintain its share of the global oil market after the ruble hit a four-year low against the dollar.

Oil prices plunged around 30% as trading opened in Asia on Monday in response to OPEC and Russia's failure to reach a deal on production cuts. The drop caused the Russian ruble to fall to 75 to the dollar, the lowest since March 2016.

Despite a public holiday in Russia, the finance ministry released a statement, saying it would sell foreign exchange reserves to mitigate the drop in the oil price and support the ruble.

"These funds are sufficient to cover the shortfall in income from oil prices falling to $25-$30/b for six to 10 years," the ministry's press release said.

On Friday, Russia refused to sign a deal with OPEC and its non-OPEC allies on additional production cuts for the rest of 2020 to counter the fall in demand caused by the spreading coronavirus outbreak.

According to energy minister Alexander Novak, Russia and other producers are free to pump oil at will after the current OPEC+ deal expires on April 1.

In response, Saudi Aramco slashed the prices of its crude exports for April, including the biggest-cut ever for Arab Light crude for Asia.

"Today's sell-off is unprecedented and comes on the heels of a supply shock due to a Saudi Arabia-initiated price war, which further exacerbates the deepening demand shock caused by the coronavirus. In terms of consequences, the level at which the price of Brent/Urals is today and to which it may drop in the coming days and weeks is hardly a boon for Russia," George Voloshin, head of the Paris branch of Aperio Intelligence, said.

Since the breakeven price of oil in Russia is estimated at $42-$50/b, the current price is very stressful for macroeconomic indicators -- the ruble's exchange rate volatility, inflation, GDP growth, tax revenue, and fiscal spending, he added.

OPEC 'CHOSE TO FIGHT FOR MARKET SHARE'

At the government meeting on economic measures late Monday, Novak said Russia favored the extension of the current OPEC, non-OPEC deal on production cuts "at least" for the second quarter through June to understand the coronavirus' impact on the market better.

"Despite this, our OPEC partners decided to increase oil production and fight for market share," the government press release quoted Novak as saying.

He added that Russia was prepared for the possibility of exiting the OPEC+ deal and the current situation in the oil market is within its forecasts.

"The Russian oil industry has a high-quality resource base and a sufficient margin of financial strength to remain competitive at any predicted price level, as well as maintain its market share," Novak said.

However, one analyst argued that the Russian government had been "practically disarmed now," with fierce competition among former allies within OPEC+ undermining its efforts to pursue active modernization as part of Russia's so-called national projects.

"As regards Russian oil producers, despite Rosneft's statements to the contrary, the collapse of the OPEC+ pact and the way it happened will take a toll on the whole industry. The economics of oil production in Russia are not particularly favorable in the long term as remote and hard-to-tap deposits will require significant capex and a government fiscal stimulus to be minimally profitable," Voloshin said.