From Irina Slav: Thanks to non-oil budget income, Russia has entirely offset the negative effects from lower oil prices in 2016, Finance Minister Anton Siluanov said at the end of 2016. What’s more, if oil prices keep their current levels, the country could turn into the black by 2019 or even earlier.

The deficit-free scenario for 2019 uses base-line international oil prices of US$45 a barrel, so growth could come earlier if the OPEC agreement leads to prices consistently higher than $50, closer to the US$60 mark or, who knows, possibly even higher.

Siluanov has already said that as long as prices stay at US$50, Russia’s budget will get additional revenues of about US$16 billion (1 trillion rubles).

In late December, President Vladimir Putin went further, saying that every US$10 rise in oil prices will bring into the federal budget around US$28.6 billion (1.75 trillion rubles) plus another US$12.23 billion (750 billion rubles) in revenues for the local oil industry.

What’s more, for this year, the federal budget – stipulating a deficit of US$45 billion (2.753 trillion rubles) – uses as a base-line an oil price of US$40 per barrel and an inflation rate of no more than 4 percent. To compare, in 2016, the inflation rate reached 5.6 percent–not too good but a definite improvement from the 12.9 percent at end-2015. So, a 4-percent inflation rate could be achievable and coupled with the very pessimistic oil price base scenario could turn Russia into an overachiever, which, of course, could be the very reason for the pessimistic scenario.

We wrote on Oilprice.com earlier how Russia basically outsmarted OPEC, reaping all the benefits from the output cut while risking far less in terms of market share loss due to a production cut. What’s more, according to Deputy Energy Minister Kirill Molodtsov, Russia won’t even have to cut its exports, as Saudi Arabia, Iraq and other Middle Eastern producers have had to because of the agreement.

On the contrary, Russia is actually planning to increase crude exports this year, albeit by just “a little more” than the 2016 figure, which has been estimated at 253.5 million tons, a 4.8-percent rise on 2015. Molodtsov did add, however, that any increase in exports will depend on “the mechanism of implementation of the production cut.”

Besides this mechanism of implementation, there is also the issue of the OPEC members that
were exempted from the production cut. Iran, for one, is wasting no time in expanding its output further, now prioritizing the five fields it shares with neighbor Iraq. Libya, for its part, is on track, according to local government sources, to reach a daily production rate of 900,000 barrels within a couple of months. Nigeria, the third exempt OPEC member, is still fighting militants in the Niger Delta but it is also increasing production and carrying out a complete overhaul of its oil industry to improve revenues.

While OPEC and non-OPEC producers agreed to cut their combined output by almost 2 million bpd in December, these three can theoretically nullify the effect of the agreement, should their combined output rise substantially enough before the end of June.

Against this background, the Russian federal budget’s US$40-a-barrel scenario seems very sober, coupled with the new focus on agriculture, and more specifically grains, which were called by the Minister of Agriculture “the new oil.”

The Market Vector Russia ETF Trust (NYSE:RSX) fell $0.16 (-0.74%) in premarket trading Wednesday. Over the past year, RSX has gained 47.58%, versus an 11.63% rise in the benchmark S&P 500 index during the same period.

RSX currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 77 ETFs in the Emerging Markets Equities ETFs category.

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