S&P Cautions on Russia

Ratings agency Standard & Poor’s this morning released a study on the impact of crude oil prices on the Russian economy. A “sustained drop” in the price of crude, “could damage the Russian economy and public finances and consequently lead to a cut the long-term sovereign rating on the Russian Federation (foreign currency BBB/Stable/A-3, local currency BBB+/Stable/A-2, Russia national scale ruAAA).”

This should be no big surprise. As S&P points out, “The price of oil has a huge impact on Russia’s economy, affecting real and nominal GDP, trade, the exchange rate, and above all public finances.” The agency further notes that a $10/barrel drop in crude prices would lead to a 1.4% drop in Russia’s GDP. And it gets worse:

In a severe stress scenario, where a barrel of Urals oil drops to, and stays at, an average $60, we would expect the general government to post a deficit above 8% of GDP. In that scenario, the long-term ratings on the Russian Federation could drop by up to three notches.

The Russian economy is all hydrocarbons, all the time. And oil plays a bigger role than natural gas, even though the country’s gas supply more often makes the headlines. Oil is where the money is for Russia:

In a situation, for example, where Asia in general and China in particular were to see a significant, potentially disorderly economic correction, we believe this could result in a large drop in the oil price, which would then affect Russia particularly severely.

The S&P press release is here.

Paul Ausick