Russian oil price pain intensifies

The Bell

Hello! This week our top story is on what the oil price crash means for Russia and whether the country’s finances can survive. We also have all the latest developments on Russia’s coronavirus epidemic, which is showing signs of plateauing, and look at investor sentiment as Pavel Durov’s blockchain platform approaches a crucial deadline.

How long can Russia survive with oil at $10 a barrel?

It was another historic week on international oil markets: futures for West Texas Intermediate (WTI) crude turned negative for the first time in history, and the price for Russian oil, Urals crude, dropped to levels not seen since 1999. Oil prices look set to remain low until at least June. Although this is a serious problem for Russia’s finances, it is not catastrophic.

The collapse of the price of May futures for WTI doesn’t have a direct link to Russia and Russian-produced oil, but Russia is suffering from the overall collapse in prices.

  • The price of Urals crude is determined by agencies Argus and Platts in relation to deliveries of Brent crude, the pricing benchmark for more than two-thirds of the world’s oil. It is usually at a discount to Brent, and Urals delivered in Rotterdam is currently being sold at $1.75 cheaper a barrel than Brent.
  • This week, Brent futures fell below $16, while the price of physical deliveries dropped to $13. Accordingly, the price of Urals crude fell to $11.50, a level that hasn’t been seen since March 1999, before Vladimir Putin was first elected president.
  • Most analysts don’t expect a recovery until the second half of the year. Oil storage facilities all over the world are close to capacity, demand has fallen 30 percent, and the new OPEC+ deal to cut production has failed to significantly buoy prices. Argus forecasts an average Brent price of $20 in the second quarter, with troughs as low as $10. The Urals discount means that its price will be several dollars lower.
  • The biggest loser amid falling low prices is Russia’s budget: the country’s tax system is built to benefit from rising crude prices, and it suffers much more than oil producing companies when prices fall. At $35 a barrel, Russia taxes oil at 50 percent, but when crude is $20-25 per barrel, taxes fall to 24 percent, according to estimates (Rus) by accounting firm Ernst & Young.
  • So, how much is Russia missing out on? Over the course of a year, a $1 drop in the price of a barrel of oil costs Russia about 130 billion roubles ($1.7 billion), said Natalia Orlova, chief economist at Alfa Bank. Russia’s 2020 budget balances at an average Urals crude price of $50, which means that if Urals is about $10 over the next two months, the budget will be 860 billion roubles ($12 billion) short. The Finance Ministry calculated (Rus) last month that the budget will be down $3.8 billion each month if the Urals price is $12.40.

The question many people are asking is whether Russia has sufficient reserves to survive a long period of low oil prices? The government is confident it does, and independent analysts agree. At the moment, budget losses are automatically compensated from Russia’s National Wealth Fund (NWF), and the liquid portion of the NWF is estimated (Rus) at a sizable $142.7 billion. Russia’s total gold and currency reserves (including the NWF) are $550 billion.

Finance Minister Anton Siluanov said (Rus) this week that the NWF’s reserves will last through 2024. And even if oil prices remain around $12 a barrel the NWF won’t run dry for about two years, according to leading currency analyst Sergei Romanchuk.

Why the world should care

Large reserves give the government a decent margin of safety even if oil prices remain low for a long period of time. Despite this, Russia is planning to spend significantly less than Western countries to support its economy amid the current crisis: just 2.5 percent of GDP. The caution is explained by President Vladimir Putin’s experiences as prime minister during the 2008 financial meltdown. The Kremlin also fears having empty pockets in 2024 when Putin must either win a fifth presidential election, or hand power to a successor.

Russia is reaching the peak of its coronavirus epidemic

While Russia remains in the world’s top 10 countries for the number of coronavirus cases, the peak of its epidemic appears to be passing. This week, the daily number of new cases dropped consistently for the first time since the beginning of the outbreak. Each region is making its own decisions about how to battle the epidemic, and Moscow continues to tighten its already-strict lockdown. As always, the leader of the North Caucasus republic of Chechnya, Ramzan Kadyrov, has been drawing the most attention.

  • By April 24, the number of patients testing positive for coronavirus in Russia reached 68,622 (10th place globally). But the daily number of new cases has begun to fall: there were 5,462 new cases Tuesday, 5,236 on Wednesday, and 4,774 on Thursday. However, numbers jumped Friday to 5,849, the second-largest daily rise.
  • The number of COVID-19 deaths remains significantly lower in Russia than other countries with similar numbers of cases — as of Friday were a total of 615 deaths, or about 0.8 percent of all cases. The reason for this discrepancy may be the inaccuracy of the official figures, or because the epidemic came to Russia later. However, this may not last: the number of hospitalized patients in Moscow, the center of Russia’s epidemic, rose 50 percent week-on-week.
  • The Bell calculated (Rus) this week when, if the epidemic continues to expand, Moscow might run out of hospital beds. We discovered that, as of Monday, there were 37 Moscow hospitals treating COVID-19 patients that were close to capacity. If the current growth of cases was to double, by early May almost half of those in need of a hospital bed would not be able to access one.
  • Despite the decrease in the number of daily cases, Moscow Mayor Sergei Sobyanin announced Thursday that Moscow is still far from its plateau, warning “there are still several more weeks before we can declare victory over the coronavirus”. The lockdown continues to be tightened in Moscow, which introduced Wednesday a digital permit system for anyone entering the city, or using their own car within the city limits. The fine for breaking the rules is 5,000 rubles ($70), and traffic cameras logged 230,000 violations on the first day to earn the city budget $16 million.
  • Sobyanin also said this week that the Moscow authorities have no plans to ease the lockdown. He told Muscovites that the city does “not want a scenario like in other countries in which troops had to be deployed” — but this caused head-scratching as no-one could think of a country that currently has troops on the streets of its capital.
  • In other regions of Russia, the situation is close to a military-style lockdown, just without the soldiers. The most radical local leader is, predictably, the head of Chechnya, Ramzan Kadyrov. At the beginning of the epidemic, Chechen police officers were filmed patrolling with plastic pipes, apparently with which to beat lockdown-breakers. Then, in his usual manner, Kadyrov forced a Chechen businessman to publicly apologize when a video emerged of him cursing the lockdown and firing a weapon into the air. Finally, Kadyrov responded to requests to reopen barber shops by shaving his head, ordering officials to follow his example.

Why the world should care

The next two weeks will show if Russia is really able to emerge from its coronavirus epidemic with fewer fatalities than other countries, and whether there will be any new explanations for the relatively low death rates.

Investors in Durov’s TON in dark as deadline approaches

There is only a week until the promised launch date for tech billionaire Pavel Durov’s TON blockchain platform. Durov pledged investors would get their money back if the platform was not up-and-running by April 30. The delay has largely been the result of a legal attempt by the Securities and Exchange Commission (SEC) to block the launch of Durov’s cryptocurrency Gram, part of the TON project. Investors in TON have no idea what Durov is planning, and several have already said they want their money back.

  • Durov’s messaging app company Telegram was planning to launch TON on April 30. It was for this purpose that Durov raised $1.7 billion in early 2018 from investors, including Silicon Valley funds like Kleiner Perkins and Sequoia. After the SEC filed its lawsuit against Telegram, disputing the legal classification of Gram tokens, Durov’s team offered investors two options: immediately collect 77 percent of their money (around $1.3 billion) or wait another 6 months for the launch. It was expected that the final U.S. court verdict would be known by now.
  • But events have complicated the process: the court issued an interim ruling in favor of the SEC that preliminarily banned Gram, and Telegram immediately filed an appeal. Now, the court must consider the appeal. The SEC has time until mid-May just to present its objections, explained (Rus) Yevgeny Krasnov, a New York State lawyer and head of Buzko Legal’s international dispute practice.
  • Telegram has not communicated with investors since last year, five sources told The Bell. “I have given up and will wait for whatever comes,” admitted (Rus) one. “Several of my colleagues have already written off their investments as losses,” another said. “I decided to wait. But one investor I know wants his money back because he changed rubles into dollars to make the investment and with today’s exchange rate even 70 percent back would be a good result,” a third source explained.
  • One of the most likely outcomes is that Telegram will give investors a similar option to the one it offered previously: wait and see how the court case with the SEC plays out, or get some of your money returned now.
  • In October, Telegram said it was prepared (Rus) to return $1.3 billion to investors. But this sum is now likely to be less: Telegram has been surviving for the past three years on the money the TON team raised in two offerings. Court documents show that, between January 2018 and January 2020, the company spent (Rus) $405 million of the $1.7 billion it has raised. Total expenditures are now significantly higher.
  • The big question is what Durov will do if investors don’t want to wait. On its own, Telegram is not making money. “I think there will be people prepared to invest in the messaging app, but, in order for this to happen, the app would have to start making money,” one investor said. Another source told The Bell he thought Telegram might sell some shares.

Why the world should care

TON was one of the most ambitious Russian tech projects of recent years. Investor interest was huge, and there were many who didn’t get a slot in the initial offering. But its fate now hangs in the balance, with everything resting on the outcome of the SEC case. The court’s decision will be a landmark moment for cryptocurrency projects across the world.

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