A bear that floats like a butterfly, stings like a bee?

by Dr Kaushik Deb, BP India economist 2012-2018


Explains how despite getting off to a bad start in early 2016, analysts are grudgingly recognizing that the Russian economy has finally managed to adapt to some of the external conditions.


With the passing of perhaps the most iconic sportsperson ever, a fighter who was an ambassador for peace and understanding, got me thinking about another rather unusual aspect of this giant. Here was a sometime over 100 kg hulk who could move faster in the ring than any athlete. And it seems that Russia is also acquiring that agility.


2016 got off to a bad start for Russia with oil prices falling to below $30 per barrel and a budget deficit of close to 5 percent seeming inevitable. Even as the country is heavily reliant on energy exports (with oil and gas contributing over half of the federal government’s revenue in the years of high oil price, ca. 40% now), analysts are grudgingly recognizing that the Russian economy has finally managed to adapt to some of the external conditions. Let me explain.


In 2012, Russia had lost 12% of the EU gas market to Norway because the Russian gas exporting monopoly, Gazprom, maintained oil price indexation, which is based on a fixed slope to Brent, even as oil remained in the $100 per barrel range. Norway, on the other hand, adjusted its pricing closer to spot prices, undercutting its bigger neighbour. By 2013, Gazprom started to offer discounts and rebates on the oil indexed prices making its gas exports more competitive. Thus, the threat from increased competition appeared to have convinced Gazprom to reduce its effective prices during periods of wide gaps between its contract based oil-indexed prices and the spot prices. 



Spencer Dale in the 2016 edition of the Statistical Review of World Energy presented a proxy for Russian export prices to Germany showing how quickly Russian export prices to Europe fell compared to the oil indexed price, and have remained close to European spot prices.


The low price of Russian gas has now resulted in an increase in Russian flows into Europe by 8% in 2015. Gazprom has also increased volumes sold directly at hubs at spot prices signalling a further shift away from oil indexation. In 2013-15, such spot sales exceeded 10% of Russia’s annual flows to Europe. In fact, Russia’s recent behavior in response to increased LNG supplies appears akin to that of Saudi Arabia in the face of US shale production: maintaining market share rather than trying to support prices by reducing production. By opting for price flexibility, the Russian gas exporting monopoly, Gazprom, has been able to increase sales into Europe countering energy security concerns. Looking ahead, Russia’s competitive position against US LNG remains strong, with significant excess production and pipeline capacity and low cost. 


The views expressed here are personal and those of the author.