Russia has abandoned hopes for a lasting recovery in oil prices, bracing for a new era of abundant crude as US shale production transforms the global energy market. The Kremlin has launched a radical shift in strategy, rationing funds for the once-sacrosanct oil and gas industry and relying instead on a revival of manufacturing and farming, driven by a much more competitive rouble.
"We have to have prudent forecasts. Our budget is based very conservative assumptions of oil at around $50 a barrel," said Vladimir Putin, the Russian president. "It is no secret that if the price goes down, investment peters out and disappears," he told a group of investors at VTB Capital's 'Russia Calling!' forum in Moscow.
The Russian finance minister, Anton Siluanov, said over-reliance on oil and gas over the last decade had been a fundamental error, leading to an overvalued currency and the slow death of other industries in a textbook case of the Dutch Disease. "We should stop caring so much about the oil industry and leave more space for others. We have to take very tough decisions and redistribute our resources," he said.
Comment: "Dutch Disease" is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country's other products less price competitive on the export market.
The new $50 benchmark for oil is even lower than the Russian central bank's "extreme scenario" of $60 first prepared last year. The new realism has forced the Kremlin to ditch a raft of budget commitments and to stop topping up the pension reserve fund. Oil and gas taxes make up half the state's revenue, and almost 70pc of Russia's exports.
Igor Sechin, chairman of Russia's oil giant Rosneft, accused the government of turning its back on the energy industry, lamenting that his company is being throttled by high taxes. He warned that the Russia oil sector will slowly shrivel unless there is a change of policy. Mr Sechin said Russia's oil companies are already facing "negative free cash flow". They face an erosion in output of up to 6pc over the next three years as the Soviet-era fields in Western Siberia go into decline. "You have to maintain investment," he said
Rosneft, the world's biggest traded oil company, is facing taxes and export duties that amount to a marginal rate of 82pc on revenues. "This is enormous, it's unbelievable. The attractiveness of the oil industry is all about tax rates," he said. He stated caustically that the government cannot seem to make up its mind how to tackle the economic crisis, openly attacking ministers sitting next to him at the VTB Capital forum. "We have lots of models but unfortunately we are failing to see any actual growth," he said.
Mr Sechin said Russia faces stiff competition from Saudi Arabia, which has begun ship oil at cut-throat prices into the Baltic through the Polish port of Gdansk, taking local market share from under the noses of the Russians.
But the 'game changer' is US shale that has displaced Saudi Arabia as the fundamental price-setter for the world. He said the immediate prospects of the global oil industry now depend on whether shale producers have enough hedging contracts to last beyond the end of the year.Russia is currently the world's largest oil producer, extracting 10.7m barrels a day (bd), but is living off legacy investments. Plans to develop the off-shore fields in the Arctic and the vast shale reserves of the Bazhenov Basin are not viable at current oil prices, and in any case rely on imported technology that is subject to western sanctions.
Mr Putin said the economic crisis has touched bottom and the decision to let the currency slide by 50pc rather than waste reserves defending the exchange rate is starting to bear fruit. "We are seeing the first signs of stabilization, even though some sectors of the economy are still in recession. We are seeing more confidence in manufacturing industries. Things are looking up," he said.
Russian companies have survived being shut out of the global capital markets for most of the last eighteen months and have repaid much of their hard currency debt as it comes due, greatly reducing their vulnerability. Capital is no longer fleeing the country. There were net inflows of $5.3bn in the third quarter, the first positive figures since 2010. "What it shows is that markets are responding very quickly to what is happening in our country", he said.
The International Monetary Fund is less sanguine. It has cut its forecast for Russia yet again, expecting the economy to contract by 3.8pc this year and a further 0.6pc next year.
I believe Russia just made one of it's best decisions ever.. A global currency crash has to happen soon. The house of cards can only sustain certain winds and the winds of change are blowing hard. There may come a time soon when food is more valuable than oil, I believe water has already reached that point. I can survive off my garden, I can't drink gas or oil. The price of oil is way too low and it is causing a lot of companies even in the US a lot of pain and a lot of them are rushing to figure out how to pay their debts.. The oil bubble is popping, and with the new deposits being found everywhere but America, I think Russia has decided to play the waiting game, Putin is a master at that. A huge oil deposit was just found in Israel and I think Putin realizes that will be a game changer for America and Israel. Fracking has to end sometime, the negative health benefits to people and the Earth are going to catch up to that market real soon. America will have to sign on with Israel for crude and Russia is willing to do that because I think Putin knows "Something Wicked This Way Comes".
If Putin really wanted to screw the Western Powers over and be the Hero of Earth, he could be the first Country to release much of the secret free energy devices currently being used by those in the know and higher up civilization types being hidden underground and in space.. Then the oil companies would absolutely go broke, die and go away, and Putin could be viewed as the savior of Earth...