Russian economy faces strain as crude oil falls below $80 (CAD 109) per barrel

Russian crude oil has become cheaper, dropping to $80 per barrel (CAD 109). This is "definitely uncomfortable for the federal budget," reports "The Moscow Times." The Russian Ministry of Finance had forecasted higher revenues from selling raw materials in its budget draft.

A few days ago, it was reported that oil prices on global markets fell below the key level of $94 per barrel (CAD 128). The relatively low cost of the resource is hitting Russia. As "The Moscow Times" explains, the price of Russian crude oil has fallen below the level that ensures the stability of the state budget.

This situation could have severe consequences for the Russian economy, which heavily relies on revenues from the export of energy raw materials. The decline in oil prices on global markets in September led to a drop in the prices of Russian Urals oil, negatively impacting oil companies' revenues.

According to Bloomberg data, at the beginning of the week, the price of Russian oil in Baltic ports dropped below $80 per barrel, reaching its lowest level since the beginning of the year. In Primorsk and Ust-Luga, on September 10, Urals oil was sold for $76.85 and $77.24 per barrel (CAD 104.35 and CAD 104.88), respectively. Slightly higher prices were recorded in Novorossiysk, where a barrel cost $80.81 (CAD 109.73). Within just two weeks, the price of Russian oil has fallen by 18 percent, posing a significant challenge to the Russian budget.

Bank analysts warn that the current oil price levels are "definitely uncomfortable for the federal budget." The Russian Ministry of Finance developed a budget draft for this year, assuming the price of Urals oil would be $94 per barrel (CAD 127.6), about 17 percent higher than the current prices. Similar assumptions were made in the budget draft for 2025.

Economist Yevgeny Suvorov from Bank Centrocredit points out that the collapse of oil prices could cause serious budget issues. Under current rules, the government will have to draw funds from the National Wealth Fund to compensate for the lack of revenues. However, this fund's resources are limited—it has only 4.8 trillion rubles (CAD 71.7 billion) of liquid assets left, of which 1.3 trillion (CAD 19.4 billion) has already been reserved for expenditures in December.

Although the budget recorded a surplus of 767 billion rubles (CAD 11.5 billion) in August, the cumulative deficit for eight months amounted to only one-sixth of the annual plan. However, revenues from oil and gas in August were 28 percent lower than in July and 20 percent lower than the average level of the previous seven months. The International Energy Agency reports that Russia's revenues from the sale of oil and gas fell by $2 billion (CAD 2.7 billion) in August, to $19 billion (CAD 25.8 billion), reaching the lowest level in a year.

Investment banker Yevgeny Kogan points out additional challenges related to next year's budget. Initially, the Ministry of Finance planned to reduce military spending by 2.3 trillion rubles (CAD 34 billion). However, in the current geopolitical situation, this is hard to believe. Suppose the share of military spending in the economy remains current. In that case, an additional 3.3 trillion rubles (CAD 49 billion) will be needed, and another 1.4 trillion rubles (CAD 21 billion) is necessary to implement President Vladimir Putin's May decrees.

Kogan warns that with oil prices below $94 per barrel (CAD 128), the National Wealth Fund could quickly run out. Given the current situation in the global energy markets, the likelihood of low oil prices persisting is significant, posing serious challenges for the Russian economy in the near future.