MOSCOW (Reuters) – Russia’s central bank has warned the Kremlin’s policy makers the United States and OPEC have the capacity to flood the oil market and cause a repeat of the prolonged price collapse of the 1980s – which contributed to the downfall of the Soviet Union.
The warning came weeks before Russian and U.S. Presidents Vladimir Putin and Donald Trump began talks to end the war in Ukraine.
Trump has warned he could impose further sanctions on Russia if there was no peace deal. He also pledged higher U.S. oil production and called on OPEC’s leader Saudi Arabia to pump more oil to help the global economy.
The central bank delivered the warning in a presentation prepared for a discussion chaired by Prime Minister Mikhail Mishustin in February and seen by Reuters.
The central bank, which scrutinises economic risks in classified reports at least once a year, did not say under what scenario OPEC and the United States could flood the market and how likely these risks were.
In its previous reports, seen by Reuters, the central bank did cite oil prices as one of the risks for the Russian economy but has never been that specific on how a prolonged low oil price cycle could arise.
The economy ministry, separately, also made a presentation for the meeting, citing other risks to the economy, such as weaker investor activity, cost increases and “bad debts”.
There is no sign that OPEC is planning any change in supply policy that would lead to a sharp rise in output.
While the United States may raise oil output further, the lion’s share of increases will likely come from other non-OPEC producers such as Guyana, Brazil and Kazakhstan, where global oil majors ramp up production.
“A significant risk is the oil price,” one of the slides reviewed by Reuters said listing among risks “a significant increase in production in the United States and outside OPEC”.
It also said OPEC’s spare capacity was near record high and added it was equal to the volume of Russian crude oil exports.
“Historical precedent – after the period of high oil prices in 1974-1985, 18 (!!!) years of low oil prices,” the presentation slide said using the three exclamation marks.
SOVIET FALL WITH OIL PRICES
For Russia, the world’s second largest exporter, oil and gas have been its strength and weakness since the Soviets discovered one of the world’s largest hydrocarbon basins in Western Siberia in the decades after World War Two.
For decades, high oil prices have allowed the Kremlin to cushion the economy and spend on political campaigns abroad such as support of governments from Cuba to Angola and Vietnam.
When prices fell, the economy hit the rocks with spectacular geopolitical consequences such as in 1991 when the Soviet Union crumbled.
The oil price collapse of the 1980s made it impossible for the Soviet Union to keep up with the United States in the arms race. Financial problems aggravated and led to the end of the Soviet Union, an event that Russian President Vladimir Putin has repeatedly described as a tragedy.
Oil prices currently trade at around $70 per barrel – a ]comfortable level for Russia and whose budget assumes price of oil of $69.7 per barrel.
Igor Yushkov, a professor at the Financial University of the Russian government, said the bank is worried due to low oil prices and a strong rouble.
“The budget is probably not doing well, because it is already the end of March, and we are not meeting the budget parameters that were planned for 2025,” he said.
Moscow has experienced several financial shocks due to low oil prices since 1991. In 1998, it defaulted on its foreign debt after prices fell to $10 per barrel.
In 2008, Moscow had to deploy its fiscal and reserve buffers to stabilise the economy and contain unemployment after oil prices fell due to U.S. subprime mortgage troubles.
Oil prices also fell steeply in the last 15 years including during the coronavirus pandemic but the short-term nature of decline did not seriously test the Kremlin’s resilience.
Putin spoke to influential Saudi Crown Prince Mohammed bin Salman earlier this month and underscored the “significance” of the OPEC+ oil deal for global oil market stability.
“The commitment of Russia and Saudi Arabia to comply with the obligations assumed in “OPEC Plus” was emphasized,” the Kremlin said in the readout of the telephone conversation.
The International Energy Agency (IEA) estimates that OPEC’s total spare capacity – idle output that can be brought online – stands at around 5.3 million bpd, close to Russian oil and fuel exports.
Saudi Arabia has said it is able to increase production from the current 9 million bpd to its maximum capacity of 12 million bpd within months.
(Reporting by Reuters; editing by Guy Faulconbridge and David Evans)
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