Russian economy update in wake of OPEC deal announcement

Russian economy update in wake of OPEC deal announcement

On 27 September, the Organization of the Petroleum Exporting Countries (OPEC) reached a preliminary deal on restricting crude supply in order to support prices. The OPEC deal, which had been mooted as a possibility since February, was the first such agreement in nearly 8 years.

The announcement of the deal appeared to improve market sentiment, as global oil prices jumped 6% right after the announcement and headed towards USD 51 per barrel in the first few days of October.

The oil production deal is good news for Russia, one of the hardest hit economies by the drop in oil prices observed in the last few years.

Urals oil, which is used as a basis for pricing of the Russian export oil mixture, settled at USD 46.3 per barrel on the last day of September, which was 4.6% higher than at the end of August and 31.8% higher on a year-to-date basis.

The OPEC deal did succeed in propping up prices initially, however, the deal can be thought of more as an “agreement to agree.” Global oil prices have since retreated slightly, now resting just above USD 50 per barrel as market participants remain sharply divided regarding how the OPEC output agreement will be implemented and carried out.

On 30 November, OPEC plans to meet to hash out the details of the deal, in the hopes of cutting production by half a million to one million barrels of oil per day. OPEC also hopes that non-OPEC exporters, especially Russia, join in on the pact.

While the Russian government hasn’t announced any agreement with OPEC following the talks, Putin’s administration has previously shown signs that it would be interested in reaching a production cap deal. Prior attempts at a deal proved unsuccessful and Moscow has taken a wait and see approach.

On 17 October, the Russian Energy Ministry stated that it expects all Russian oil companies to participate in an oil output freeze of their own.  

“We continue to work with our companies, hold consultations and hope that they all would take part in [the output freeze]. Taking into consideration that it would be profitable both for companies and budget as it will maintain prices and the investment process for companies, we count on a common approach in the implementation of these goals," commented Russian Minister of Energy Alexander Novak.

As the largest oil exporter in the world after OPEC, it is critical for the Russian economy that oil prices rise and any deal to cap production will be good news for the country’s economy.

The consequence of low oil prices for the Russian economy has been a lasting recession after years of booming growth. Russia has undergone a painful economic adjustment, but the recession appears to have softened in the first half of this year as oil prices began to rise.

The economy’s second quarter contraction was the slowest since the recession began in late 2014. Comprehensive data released in September showed that GDP contracted 0.6% annually in Q2, which came in above the 1.2% decrease recorded in Q1. 

More recent economic data indicate that the economy is back on track to return to growth in 2017 as well. Business activity in Russia’s manufacturing sector continues to show signs of improvement. The Manufacturing Purchasing Managers’ Index (PMI) produced by IHS Markit rose from 50.8 in August to 51.1 in September, which was a second consecutive improvement. The indicator remains above 50, meaning that the sector remains in expansion mode.

Inflation fell from 6.9% in August to 6.4% in September, which marked the lowest level since February 2014. As a result, Russian households were less pessimistic in Q3. The gradual recovery in real wages and the stabilization in the ruble has also aided in the rise in consumer confidence.

According to the Federal Statistics Service (Rosstat), the consumer confidence indicator increased from minus 26 points in Q2 to minus 19 in Q3. Although the index remains well below the 0-threshold that distinguishes between optimism and pessimism, Q3’s result was the highest since Q4 2014.

In addition to the positive economic indicators, recent data show that oil output in Russia spiked to 11.1 million barrels a day in September, a new post-Soviet era high. Russia’s economic recovery is likely to pick up the pace if the increase in oil prices quickens on the back of solid output agreements domestically and especially internationally with OPEC. We’ll have to wait and see what happens on 30 November.

Date: October 20, 2016

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