"Low Oil Prices, Russia to Endure with Sovereign Wealth Fund"... Russia Accepts Chicken Game

Russian Finance Minister "Can Cover 10 Years of Funding Shortfall Despite Oil Price Drop"
International Oil Prices Plunge Over 20% in One Day
Enduring Oil War with Russian Sovereign Wealth Fund
Saudi Arabia Faces Inevitable Astronomical Tax Revenue Deficit This Year

[Asia Economy Reporter Naju-seok] Russia has prepared a countermeasure in the 'chicken game' of crude oil production increase by Saudi Arabia. The production increase by Russia and Saudi Arabia, who failed to reach a production cut agreement, has entered the final countdown. The international community is paying attention to whether the two countries, which relied on crude oil sales revenue, can withstand the economic shock caused by the sharp drop in oil prices.

According to foreign media on the 9th (local time), Anton Siluanov, Russian Minister of Finance, said, "If oil prices remain at $25 to $30 per barrel, we will utilize the sovereign wealth fund worth $150 billion (180 trillion won) as financial resources," adding, "With this amount of funds, even if income decreases due to the drop in oil prices, we can cover the shortage of funds for the next 6 to 10 years."

On the same day, international oil prices plunged more than 20%. On the New York Mercantile Exchange (NYMEX), April delivery West Texas Intermediate (WTI) crude oil closed at $31.13 per barrel, down 24.6% ($10.15) from the previous trading day. This is the largest single-day drop since the Gulf War in 1991. At 2:49 p.m. on the London ICE Futures Exchange, May Brent crude also plunged 23.83% ($10.79) to $34.48 per barrel.

Oil-producing countries discussed production cuts in response to the demand decrease caused by the novel coronavirus disease (COVID-19), but the direct cause was the failure to reach an agreement and Saudi Arabia's announcement of a production increase policy. There are also forecasts that if Russia and Saudi Arabia engage in a bleeding competition until the other collapses, oil prices could plummet to around $20 per barrel.

[Image source=Reuters Yonhap News]

Minister Siluanov's remarks emphasized Russia's confidence in enduring the chicken game. Previously, Russia suffered serious damage during the Saudi-led chicken game in 2014. At that time, due to decreased crude oil imports, the ruble plummeted to an all-time low, causing enormous economic losses. The Russian government states that 2014 and now are different.

According to foreign media, Russia's sovereign wealth fund is evaluated to be able to provide about $1.7 billion monthly to the government as financial resources for the next 10 years even if oil prices remain at the current level.

Russian media stated, "Russia not only has the opportunity to produce and sell as much as we want but also can overthrow the U.S. shale industry," adding, "Russia's finances are more stable than Saudi Arabia's and are prepared for low oil prices."

Russia's foreign exchange reserves amount to $570 billion, surpassing Saudi Arabia's $502 billion. Russia's fiscal burden is also lighter than Saudi Arabia's. Initially, Russia prepared its budget based on an expected oil price of $42 per barrel this year, while Saudi Arabia is known to have drafted its budget assuming an oil price in the $80 range, which is twice as high.

Many view that Saudi Arabia will suffer more economic damage. Mohammed bin Salman, the de facto ruler of Saudi Arabia, has been pushing projects for the modernization of Saudi Arabia, but under the ultra-low oil price situation, a shortage of funds is inevitable. Monica Malik, chief economist at Abu Dhabi Commercial Bank, predicted, "If Saudi Arabia executes its budget as planned while oil prices remain low like now, the fiscal deficit will reach $100 billion."

However, there is also an opinion that Saudi Arabia can endure by leveraging economies of scale, as it is the world's largest crude oil producer.

This content was produced with the assistance of AI translation services.