Saudi Arabia and Russia: Whoever screams first about the pain of falling oil prices


London For decades, the oil giants Russia and Saudi Arabia have accumulated massive financial reserves that will help them fight a long price war. But in this finger biting game, who will scream first?

Oil prices collapsed by a third after Riyadh reduced its crude prices and announced that it would increase production, plunging the shares of national oil companies Aramco and Rosneft.

The two countries are the largest oil exporters in the world, and each has significant financial reserves to prevent economic shocks, while both opponents brag about their resilience.

Moscow says today it can carry oil prices between 25 and 30 dollars a barrel for up to 10 years. While Riyadh can afford this, by selling more crude to reduce the impact on its revenues.

However, a war of attrition will be devastating in any case and will force both countries to make difficult economic changes the longer they last. It depends on how much pain each side can handle, according to Hassanein Malik, director of equity strategy at Telemer. He adds that the Saudi financial break-even point, that is, the price of oil that achieves a budget without deficit, is at about $ 80 a barrel, equivalent to twice the break-even point for Russia.

Oleg Fusion: Russia will face higher inflation and interest rates due to the price war
Oleg Fusion: Russia will face higher inflation and interest rates due to the price war

Riyadh has $ 500 billion in foreign reserves and a low debt-to-GDP ratio of 25 percent, which provides ample room for borrowing.

It has been able to borrow more than $ 100 billion in hard currency since 2016 to offset the impact of lower oil prices.

Saudi bonds and Aramco shares fell sharply on Monday, as the riyal fell against the dollar on the futures market, but recovered most of its losses yesterday.

With global interest rates falling and the recent downward trend leading to further decline, Riyadh can knock on the doors of debt instrument investors at relatively cheap rates regardless of market fluctuations. But the problem for Saudi Arabia is that keeping oil prices low in a sustainable manner may curb government spending on projects within the efforts of Crown Prince Mohammed bin Salman to diversify the economy’s resources.

According to Monica Malik, chief economist of Abu Dhabi Commercial Bank, that in light of the decline in oil prices to the beginning of the $ 30 price range, Saudi Arabia will post a deficit in the dozens field as a percentage of the gross product this year, up from an expected 6.4 percent in the budget.

As for Russia, it accumulated reserves in the era of Vladimir Putin by about $ 570 billion and liberalized the exchange rate of the ruble, allowing it to respond quickly to market conditions and decline.

Analysts say Moscow is in a much better position to withstand an economic shock like the one in 2014 when the West imposed sanctions over its annexation of Crimea from Ukraine, or like that in 2008 when it was plagued by the global financial crisis.

Last week, Finance Minister Anton Silwanov said that many previously criticized the accumulation of financial reserves and said that Moscow “is holding gold … but the situation may change now and we will finance all the expenses that we have incurred and we are committed to using this treasure fund.”

Russia’s reserves include the national wealth fund, which amounts to $ 150 billion, equivalent to 9.2 percent of the country’s gross domestic product. The Finance Ministry says the fund can be used to ease the decline in oil revenues.

The central bank confirmed that it would suspend foreign exchange purchases for thirty days in an attempt to ease pressure from the ruble and that it would take market conditions into account when deciding to move forward with government bonds denominated in the Russian ruble in the future.


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