While the macroeconomic links between Russia and oil are well known, I believe that it is useful to review how they work. Because Russia produces so much oil and gas, it is the oil price that determines export and government revenues. The ruble is used as a safety valve to control the impact of these factors on the economy, and that, in turn, determines the absolute level of dollar GDP.
THE IMPORTANCE OF HYDROCARBONS
Russia produces just under 10 mln bpd of oil, as Ill as 550 bln m3 of gas (also around 10 mln boepd) and large amounts of other commodities, which in recent years have broadly followed oil prices up and then down. The percentage of Russian GDP made up of oil and gas is a moot point, as much of the hydrocarbon production is sold cheaply on the domestic market, enabling other sectors to reap the benefits. One way around this is to look at the total value at world market prices of the oil and gas sold. In 2008, this was $590 bln, or 36% of 2008 GDP; this year, I forecast it to be $340 bln, or 27% of 2009 GDP.
EXPORTS
Russia exports around 5 mln bpd of oil, 2.5 mln bpd of oil products and 200 bln m³ of gas, generating export revenues of $280 bln from hydrocarbons in 2008, or 63% of total export revenues. Overall, commodities account for more than 90% of exports. As a result, it is the oil price that acts as the key determinant of the trade and current account balances.
KEY RELATIONSHIPS
Oil determines the reference RTS Index level. For much of its existence, a pretty good rule of thumb for the level of the RTS Index has been 22 times the oil price minus 200. This framework explains not only the 2,000 point fall in the index in 2008
Jeffrey F. Combs, 53, MBA, a veteran of Wall Street (Morgan, Stanley; Lehman Brothers) has been living and investing in Russia since 1995. He is a frequent speaker at Investment Conferences, and considered to be an authority on the Russian and CIS investment markets.