beyondbrics

The Gulf of Mexico oil spill is an environmental catastrophe. The US president wants to use it as a chance to move the world’s biggest economy away from oil. So what does that mean for an economy built on energy export, like Russia’s?

Chris Weafer at Uralsib, a Russian bank, says that for up to the next three years, the spill may provide Russia with an opportunity to reform its economy for the better.

Russia’s fortunes are heavily dependent on the price of oil. It became the world’s largest crude producer last year – responsible for 12.9 per cent of global supply, according to data from BP released earlier this month. And Russia’s RTS equity index is to some investors a proxy for the price of oil itself.

So how does the spill help Russia? Weafer says that President Obama’s drive for tougher regulation will likely be matched around the world. Tougher regulation will mean higher production costs – costs which will be translated into higher prices. As Weafer says:

This does not mean that the price of oil will be pushed up above $100 p/bbl or higher but it does mean that we will see a more solid base established around current levels. That is what is ideal for Russia, i.e. oil below $60 p/bbl means that the government will scale back budget spending and the country will be much less attractive to investors. Oil at $90 or higher builds up inflationary pressures, makes the currency uncompetitive and slows the incentive for government to push reforms.

So, goes the argument, with oil prices given a solid floor of around $75, Russia has a window of opportunity to change. That window will be open until alternative energy projects commissioned in Russia and around the world now get up to speed – Weafer estimates that to be about 3-5 years (his positive call on higher oil prices and on Russia is for 12-36 months). Until then Russia can exploit the higher oil price to build up infrastructure and diversify the economy away from fossil fuels.

And aside from the higher oil price, Russia should get a second boost from the spill.

International oil companies have been reluctant to commit to major new investments in Russia since Sakhalin and the attack on BP…

Now that the US is likely to be more restrictive and with tougher regulations, Russia may again be a lot more attractive for international energy companies.

Tim Ash at RBS seems pretty unconvinced. The Russian economy is not doing well despite low base effects, a massive fiscal stimulus and relatively high oil prices, he says. And international investors still don’t see Russia as a good long-term investment – which helps explain why Russian stocks trade at a discount to their emerging market peers.

Even Weafer notes that this might be Russia’s last chance to get it right.

[Russia] has one last shot at making strong headway with the diversification as, if it waits until the oil price peaks and rolls-over, then momentum will be lost and investment sentiment negative.