The collapse in oil prices has exposed some vulnerable economies. All of them are dependent upon crude export sales to maintain even the appearance of a national budget.
As you might expect, every member of OPEC falls into this group, although Saudi Arabia, Kuwait, and the United Arab Emirates have sufficient reserves that will allow them to carry sizable budget deficits for some time.
However, Venezuela, Iran, and Nigeria are in a real bind. Each needs oil to be over $100 a barrel to keep it all afloat. That's tough to finesse when oil is selling for less than $60 a barrel.
Today, Caracas is on the verge of defaulting (again) on its sovereign debt, Tehran may need to reintroduce rationing, while Abuja is fighting an incendiary civil war against Islamist fundamentalists in the north.
Yet these nightmares are hardly limited to OPEC. Other export-dependent producers are likewise taking it on the chin.
And at the top of this list is Russia, which has now come completely off the rails…
Low Oil Prices Have the Kremlin on the Back Foot
As it stands, Moscow relies on the taxation of oil and natural gas exports for at least 50% of its central budget. An additional amount is garnered from proceeds indirectly dependent upon both the internal and external trade in oil.
The problem is the current budget planning in the Kremlin had been based on a price of at least $85 a barrel for the Urals Export Blend, Russia's only genuine graded crude. As an inferior grade compared to the Brent benchmark, it trades at discount.
That means Brent needs to trade at more than $90 to arrive at a price that can make Moscow's central budget work. This scenario is hardly likely with Brent trading below $70 these days.
So the Kremlin has been scrambling. The combination of low oil prices and increasingly painful Western sanctions over Ukraine has put a major strain on the Russian economy.
As it all unfolded, first it was met with bravado. But that didn't last long.
With the Ministry of Finance (MinFin) already indicating a recession would hit in the first quarter of next year, the contraction in oil has made the situation even worse and the responses more serious.
Second, President Vladimir Putin announced cuts on the expenditure side in the budget. Most of these remain to be identified, but they will certainly hurt those who can least afford it- pensioners, those needing medical care, employees of companies reliant upon government contracts, and the local authorities that have been laboring under heavy expenses to provide for well over 200,000 refugees from Eastern Ukraine.
You see, the Russian government still operates much of its economy as "extra budgetary." This means essential services, infrastructure, even the production of necessary materials remains off the books. A strain in finance, therefore, has a magnifying effect beyond the "official" figures.
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.