Russia Forecasts Larger Deficit as Oil Profits Shrink

Russia Forecasts Larger Deficit as Oil Profits Shrink
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Russia Forecasts Larger Deficit as Oil Profits Shrink

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Oil is one of the most important exports for Russia. However, the recent decline in Oil prices is starting to hurt the economy. Gross Domestic product (GDP) prospects, have been lowered by  the finance department, which now forecasts a net deficit equal to 1.5% of GDP.  Only a few weeks ago, Russian President Vladimir Putin consented to amendments to the 2012 budget that projected the deficit at 0.1% of GDP.

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The initial forecast projected a Russian net deficit of 876.589 billion rubles ($27 billion) or 1.5 percent of GDP, which the president reduced to only 68.144 billion rubles ($2 billion) or 0.1 percent of GDP, about two weeks ago, Forbes notes.

The report quotes the finance minister, Anton Siluanov, retracting the initial forecast saying, “The deficit is likely to be higher than 0.1 percent of GDP. It is likely to be about 1.5 percent of GDP as it was at the initial terms of the budget.”

Russia is the world’s largest natural gas exporter and ranks among the top energy producing countries globally. It is also the leading oil exporter to Europe, where demand has decreased due to slower growth.

The European crisis has contributed to decline in demand for Brent in Europe, and consequently lead to a decline in the commodity price. The Russian-based Urals Mountain oil prices usually trade at a discount to Brent; this means that the current price for Russian oil is even lower than the average global markets price.

As mentioned earlier, oil is a vital factor of production for Russia’s GDP; this enormous contribution comes from the oil companies operating in Russia; including both local and foreign joint ventures. Oil companies in Russia face high taxates rates, something that does not encourage investment especially under the current lower prices of oil.

Some of the top oil companies are: Gazprom OAO (PINK:OGZPY) (FRA:GAZ) (MCX:GAZP), which noted that the results for the first quater of 2012 are likely to be worse compared to the 2011 fourth quarter. The forecast cut is due to reduced exports to Europe and discounts offered to customers.  On the hand, Rosneft Oil (MCX:ROSN) 2012 Q1 profit shot up by 55.6%.

Other companies that heavily contribute to Russia GDP include TNK-BP (MCX: TNBP), which is a joint venture with BP plc (LON:BP) (NYSE:BP), and Novatek OAO (MCX: NVTK).


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