Low oil prices due to weakened global economic prospects could weigh on Russia’s economic development next year

The price of crude oil has fallen in recent months as the prospects for economic growth have darkened and the global supply of oil has exceeded expectations. The Brent oil price averaged 76 dollars a barrel in first weeks of December. Based on the price of oil futures contracts, markets expect the price of crude oil to remain at about the same level next year.

The trend in oil prices on the world market is central to Russia’s economic outlook. About a third of revenues flowing to Russia’s federal budget next year should come from taxes on oil and natural gas. The most important revenue stream is the mineral extraction tax on oil, reflecting the fact that the emphasis in Russian oil taxation has shifted gradually in recent years away from exports to production. At the start of next year, oil export taxes are set to be eliminated altogether. The mineral extraction tax is determined by volume of oil production, global oil prices and the ruble-dollar exchange rate.

Russia’s budget next year assumes that the average export price of Russian oil will be 71 dollars a barrel. After the imposition of sanctions on Russian oil, the export price for taxation is defined in terms of the Brent crude price. Next year, the tax is calculated based on a price with a discount of 15 dollars from the prevailing Brent price. If oil prices remain at current levels as implied by the futures markets, the average level of 2024 oil price used in Russian oil taxation would be 61 dollars a barrel, i.e. 10 dollars less than the current budget assumption. Both Russian and non-Russian forecasts suggest that Russian crude oil production will decline slightly next year.

Russia’s budget framework for next year anticipates a federal deficit of around 1 % of GDP. Budget revenue expectations for revenues other than oil & gas are rather optimistic. The current price expectations suggest that also Russia’s oil revenues could be more modest than officially anticipated, so the budget deficit next year could be larger than currently presumed. Lower oil prices can also reduce Russian GDP growth. Most forecasts currently anticipate Russian GDP growing by 1–1.5 % next year.

Russian oil is still sold with a discount, although the discount has declined.

Sources: IEA, BOFIT.