Oil cut deal: Like Nigeria, Russia braces for the worse

The Organization of Petroleum Exporting Countries, OPEC and some non-OPEC countries met last weekend for a review of their production cuts, the central bank of Russia said the country is preparing should oil crashes near $40 a barrel.
In March, oil prices declined by 10 percent amid supply woes.
“The Finance Ministry, the cabinet and the central bank are leaning on the cautious side in terms of their expectations regarding growth, driven still to a large degree by oil,” said Piotr Matys, an emerging-market currency strategist at Rabobank in London. “It’s better to be conservative and to be surprised on the upside than too optimistic and end up disappointed.”
Russia’s Finance Ministry similarly highlighted the $40 level in January when it announced that the central bank will start buying foreign currency on its behalf when crude exceeds that level in order to insulate the exchange rate from oil volatility. The price of $40 is additionally being used to calculate the country’s budget in 2017-2019.
Late 2016, the Federal Government set the fundamental assumptions for the 2017 budget.
According to the Minister of Budget and National Planning, Udoma Udoma, at the presentation on the 2017-2019 medium term expenditure framework (MTEF) to civil society groups in Abuja, 2017 budget was based on oil benchmark of $42.5 per barrel and average daily oil production output of 2.2 million barrels per day.
As part of the key assumptions, the Minister said crude oil benchmark price and production under the 2018-2019 MTEF would be at $45 per barrel and $50 per barrel respectively.
However, the Senate adjusted the benchmark to $44.5 per barrel.
Nigeria relies on the export of about 70 percent of its oil production capacity to raise revenue to fund its budget.
Even as oil has recovered, Russia just like Nigeria, has tendency to stick with the more conservative scenario, is “positive” as it “leaves room for upside surprises,” according to Viktor Szabo, a bond fund manager at Aberdeen Asset Management Plc.
Forecasting oil is no game for the Bank of Russia. Its 65 percent plunge in 2014 and 2015 battered the nation’s currency, forced an emergency rate increase in the middle of the night and pushed Russia into recession. The share of oil and gas revenue was at 36 percent of budget income in 2016.
Even as the historic OPEC supply-cut deal helped halt oil’s collapse, pushing it up to $55 a barrel and setting the stage for Russia’s economic recovery, the central bank is taking nothing for granted.
The correlation between the ruble and oil has declined this year, falling to the lowest since August 2015, according to data compiled by Daily Times.
Crude slided below $50 a barrel last week, the Russian currency barely budged, weakening less than 1 percent, because its carry-trade appeal largely offset the dimming outlook for energy.
While OPEC won’t formally decide until May whether to prolong the deal, which lasts through June, officials met past weekend in Kuwait to discuss its progress.
Oil will tumble to $40 if OPEC doesn’t extend its agreement later this year.
“Once (actually more than once) bitten, twice shy,” said Elina Ribakova, an economist at Deutsche Bank AG in London. “The central bank and the Finance Ministry are sticking to the conservative $40 oil scenario because they want to be ready for and protect themselves against the worst-case scenario.”