Kudrin Uneasy Over Oil Price Downturn

Falling oil prices might mean that Russia will begin to spend its financial cushion, the Reserve Fund, in 2015, Finance Minister Alexei Kudrin said Thursday.

The draft federal budget for the next three years, which the Cabinet approved Thursday, is based on the assumption that Russia's main oil blend, Urals, will sell at $95 per barrel next year.

That would represent a sizeable drop from the average of $112 that Urals was trading at this week, according to figures from the Economic Development Ministry.

As the world economy slows down, the government forecast in the three-year budget that the oil price would further fall to $90 in 2010 and $88 in 2011.

Russia's windfall revenues from oil and gas exports will peak this year, Kudrin told reporters after the Cabinet session. The country depends on the oil and gas industry for nearly half of its budget revenues.

After 2015 to 2017, Russia may have to begin emptying the swelling Reserve Fund because "oil and gas revenues will be insufficient," Kudrin said, Interfax reported.

The government's oil price estimates are sensible but could be lower, given the volatility on the market, said George Lilis, an analyst at MDM Bank.

"If I were the government and budgeting for the next three years, I would be more conservative, especially in a country like Russia where oil revenues are such a big portion of the budget revenues," he said.

Importantly, the price forecasts are high enough to allow oil producers to undertake expensive greenfield projects in eastern Siberia as existing fields in western Siberia become depleted, Lilis said.

Under a more pessimistic scenario, the oil price could fall to $75 by 2011, the Economic Development Ministry said in a statement posted on the Cabinet's web site late Wednesday.

In an even more daunting scenario, the Central Bank said in the same statement that Urals could sell at a low of $66 next year and $60 in 2011.

Oil production will remain almost flat this year, the Economic Development Ministry predicted. It is on track to reach 492 million tons, from 491.5 million last year, it said, a growth that may in part be due to one extra day this year, which is a leap year.

But the ministry said it expected more vigorous growth in the next three years. Russia will produce 503 million tons next year and 518 million tons in 2011, it said.

Budget spending, which is likely to be approved by the parliament and President Dmitry Medvedev, will grow by one-third to 9 trillion rubles next year on revenues of 10.9 trillion rubles.

Much of the growth will pay for 30 percent raises in salaries to budget-dependent workers and higher spending for research and education, Prime Minister Vladimir Putin said at the Cabinet session.

Under the draft budget, spending will further increase to 10.3 trillion rubles in 2010 and 11.3 trillion rubles in 2011.