"Oleg Bogdanov Shares Million-Dollar Concepts"
Breaking News: OPEC+ increases oil production, and what it means for Russia
In a surprising move, OPEC+ has announced plans to boost oil production by 411,000 barrels per day, starting in June 2025. This decision comes with a phase-out of the voluntary 2-million-barrel cut, taking place against the backdrop of a worsening trade war. Economist Oleg Bogdanov from Kommersant FM explains the potential impact on Russian assets and the ruble.
Oleg Bogdanov: The main reason behind OPEC+'s increased oil production is competition. As the world's leading oil producers, OPEC+ aims to capture a larger share of the market. Russia supports this decision, perhaps because our oil is currently being sold at a discounted rate. Comfortable oil prices of around $50-$60 per barrel suit Russia nicely.
Russian financial authorities seem to have their sights set on weakening the ruble. Historically, the Ministry of Finance and the cabinet have shown interest in having the ruble trade around 93-95 rubles per dollar. After vacation season, the Central Bank may begin offering increased liquidity at seven-day repo auctions to help weaken the ruble, compensating for the risks associated with OPEC+'s decision.
Potential Risks and Challenges:
- Reduced Oil Export Revenue: With the production hike occurring amid tepid global demand, lower oil prices could significantly cut Russia's export revenue, a vital source of foreign exchange and budget funding.
- Strict Compliance: OPEC+'s stringent adherence to production quotas and compensation for overproduction could lead to additional output cuts if Russia fails to meet requirements, exacerbating revenue losses.
- FX Inflows Disruption: Less income from oil exports could weaken Russia's trade surplus, reducing inflows of dollars/euros needed to maintain a stable ruble.
- Market Sentiment: A global recession, potentially triggered by trade wars, could suppress commodity demand and investor interest in emerging-market assets.
- Fiscal Pressure: Reduced oil income might test Russia's fiscal breakeven oil price (estimated near $70–$80/bbl), possibly forcing austerity measures or increased borrowing.
- Sanctions Impact: Escalating trade wars may compound existing sanctions pressure on Russia's financial markets.
Mitigating Factors:
- Flexibility: OPEC+ retains authority to stop or reverse production hikes if necessary, providing some stability.
- Strategic Adjustments: Russia could prioritize non-OPEC+ collaborations or implement currency controls to mitigate shocks.
In conclusion, the combined effects of OPEC+'s production hike and trade-war-induced recession could strain Russia's fiscal position and currency stability, possibly requiring proactive policy measures to soften these impacts.
- Oleg Bogdanov, an economist from Kommersant FM, suggests that the increased oil production by OPEC+ is driven by competition to capture a larger market share, a decision that Russia supports, potentially due to the current discounted rate of its oil.
- The Russian financial authorities aim to weaken the ruble, and they are likely to provide increased liquidity at seven-day repo auctions after the vacation season to help achieve this goal, offsetting the risks associated with OPEC+'s decision.
- Despite these efforts, there is a likelihood of reduced oil export revenue for Russia due to a production hike amid tepid global demand, which could significantly cut Russia's export revenue, a crucial source of foreign exchange and budget funding.
- Strict compliance with OPEC+'s production quotas could lead to additional output cuts if Russia fails to meet requirements, worsening revenue losses.
- reduced oil income might test Russia's fiscal breakeven oil price (estimated near $70–$80/bbl), potentially forcing austerity measures or increased borrowing, and may also compound existing sanctions pressure on Russia's financial markets.
