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. Last Updated: 07/27/2016

Oil-Wary Cabinet Passes 2002 Budget

The government signed off on the draft 2002 budget Tuesday while voicing concerns about the impact of crumbling global oil prices on planned revenues.

Finance Minister Alexei Kudrin offered assurances that Russia would make good on future debt repayments.

Energy Minister Igor Yusufov said he has agreed to cooperate with OPEC in trying to stabilize oil prices, which plummeted to fresh 17-month lows Tuesday.

The Cabinet gave final approval to a budget with a surplus of 78.3 billion rubles ($6.06 billion), or 1.63 percent of expected gross domestic product. Revenue is set at 2.126 trillion rubles and spending at 1.947 trillion rubles. GDP is to expected to grow 4 percent, compared to an anticipated 5.5 percent this year.

The draft forecasts the average price for a barrel of oil next year at $18.50. The budget loses $90 million for each 10-cent drop in oil prices.

Prime Minister Mikhail Kasyanov told the Cabinet meeting that oil is a wild card that is raising concern.

"Despite positive trends [this year], there are a series of uncertainties, which the government must take into account," Kasyanov said.

He noted that the price of Urals blend crude has lost about $10 a barrel in value in recent weeks.

The Brent benchmark blend, which dived 13 percent Monday, continued to slip Tuesday on the London International Petroleum Exchange. Brent crude futures were down 67 cents at $21.35 a barrel by 9 p.m. Moscow time. Monday's decline was the largest daily price drop since Jan. 17, 1991, when the United States and its allies began aerial attacks on Iraq for its invasion of Kuwait.

The Russian Urals blend was trading at $20.43 a barrel late Tuesday, far below the high of $28.17 reached Sept. 17 in the wake of the terrorist attacks on the United States.

Oil's volatility comes at an inopportune time for the government, which is trying to pass a strict budget that will allow Russia to pay $19 billion in debt obligations due in 2003.

Analysts say that Urals is trading dangerously close to the $18.50 a barrel forecast in the 2002 budget.

"Lower oil prices would clearly be a negative for Russia, but our initial analysis shows that if prices fell to the 10-year average of $17 per barrel, it would certainly not be a catastrophe," said Philip Poole, ING Baring's chief economist for Eastern Europe.

If oil prices did in fact fall this low, they would turn a projected budget surplus into a deficit of $5.7 billion, which would need to be funded by additional external or domestic borrowing, Poole said.

Kudrin said the government is reserving the right to borrow $2 billion on international markets in the event that budget revenues come in lower than expected. But he was quick to add that Russia would fulfill all its debt obligations no matter what the price of oil turns out to be.

"We will ensure that the debt payments are completely paid off and that the level of social expenditures will not be lowered," Kudrin told journalists. "The government will be required to analyze a series of protection measures so that our obligations will be met no matter what the market conditions are."

The State Duma has lobbied for more social expenditures than originally planned, meaning a relaxation of fiscal discipline. Kudrin said that any possible additional expenditures would have to be tied directly to the amount of extra revenues.

He said that revenues earmarked for a special reserve fund to help meet future debt obligations have been raised from 57.9 billion rubles to 109.8 billion rubles ($3.73 billion).

The budget goes to the Duma for a first reading Friday.

Alexander Zhukov, head of the Duma's budget committee, said the budget has a "good reserve of strength" and has a strong chance of being passed in first reading.

"Spending will be financed even if the price for Russian oil drops to $17 a barrel," Zhukov was quoted by Interfax as saying after the Cabinet meeting.

Despite their jitters, government officials remain hopeful for an increase in the crude price and say it is useless to try to predict revenues from crude exports before the next meeting of the Organization of the Petroleum Exporting Countries, set for Wednesday. OPEC accounts for about 40 percent of the world's crude production.

OPEC decided to reduce output by 1 million barrels per day as a Sept. 1, but only 550,000 bpd were cut out of production. This lack of adherence on OPEC's part has resulted in surplus production of 1.4 million bpd, according to the United Financial Group brokerage.

Energy Minister Yusufov consulted with OPEC Secretary-General Ali Rodriguez on Tuesday and later told reporters that the recent plunge in oil prices is a "temporary phenomenon."

Yusufov -- while reiterating earlier statements that Russia has no immediate plans to join OPEC -- said he has reached an agreement with Rodriguez to "make a joint effort to stabilize the situation on the oil markets."

Russia may resort to the regulation of exports, a drastic departure from the ministry's earlier policy, he said. In the past, Russia has taken advantage of OPEC cuts to increase its own exports, partly offsetting the effect on prices.

OPEC has repeatedly said it wants to keep world oil prices in a $22 to $28 corridor.

Yusufov, speaking at his first news conference as energy minister earlier this year, gave no hint of straying from the government's line, saying, "The ministry will first do what is good for Russia."

Now that stance appears to have changed.

Yusufov said Tuesday that the ministry is creating a special committee to help stabilize oil prices. The committee, which will be composed of representatives from Russia's major oil companies as well as officials from other government agencies, is to closely watch price dynamics and regulate export flows.

He said the decision to form the committee had been made at a meeting with the oil companies. He did not say when the meeting took place.

LUKoil, the nation's No. 1 oil producer and exporter, declined to comment on Yusufov's announcement.

"LUKoil was at the meeting, but the press service found out by watching the news," a LUKoil spokesman said.

Stephen O'Sullivan, head of research at UFG, was skeptical that such a committee would help matters.

"It sounds like Yusufov is paying lip service to OPEC's wishes," O'Sullivan said. "I'm sure it will turn out like before, where Russia will say one thing but continue to pump out oil at maximum."