Russian oil drops below $50 — a growing headache for the Kremlin
Photo: EPA

The price of Russian oil in rubles has fallen to a two-year low. According to Reuters, the average price of Urals and ESPO crude oil blend fell to $48.92 per barrel, or 3,987 rubles, on May 2.

This price is about 40% lower than what was planned in the Russian federal budget.

Reuters writes that the Russian government will likely have to raise taxes, cut social spending and increase borrowing if it wants to balance the budget without cutting defense spending.

See also
Oil Supply and Demand: What Could Affect Russia's Revenue Decline

According to sources Bloomberg, the Russian government is considering lowering the threshold of the so-called "budget rule" from the current $60 to about $50 per barrel of oil starting next year if oil prices remain low.

This mechanism works as a hedge against falling oil prices and allows for the transfer of excess energy revenues to the National Welfare Fund when Russian oil is over $60 per barrel. The accumulated reserves then help to offset losses when oil prices are lower.

Discussion of lowering the budget rule threshold indicates that the Russian government is increasingly confident that the decline in global oil prices will continue and that a significant recovery is not expected in the near future.

This will force the Kremlin to look for other ways to replenish its military budget at record levels of military spending and cut other government spending.

  • The drop in oil prices is due to a deteriorating global economic outlook (which means less oil consumption) and an increase in supply on the market ( OPEC+'s decision to produce more). Together, this creates an oversupply of oil over demand.