The Central Bank considered the parameters of the new budget rule to be too high

MOSCOW, 26 Aug — PRIME. Analysts of the Central Bank of Russia called the parameters of the new budget rule too high, including the discussed cut-off price for oil at $60 per barrel, follows from an analytical note by the Central Bank’s Research and Forecasting Department.

The content of the note reflects the personal position of the authors and may not coincide with the official position of the Bank of Russia.

The Ministry of Finance of the Russian Federation, according to the budgetary rule, directed additional income from the high price of oil to the purchase of foreign currency and gold to replenish the NWF. For 2022, the cut-off bar was at $44.2 per barrel. This year, the rule was suspended, all oil and gas revenues of the authorities will be able to direct to finance budget obligations.

In July, the Vedomosti newspaper, citing sources, wrote that the RF Ministry of Finance proposed changing the budget rule in the following parameters: focus on the cut-off price of $60 per barrel when calculating basic oil and gas revenues and fix production at 9.5 million barrels per day. The ministry itself then said that the updated design of the budget rules is now being discussed in the government, but it is still premature to talk about specific decisions.

“In the new modification of the budget rule announced by the Russian Ministry of Finance, the base price of oil and the volume of oil production seem to us overstated,” the Central Bank analysts said in a note.

“In the new realities, given the significantly widened discount of Urals oil to Brent, in order to maintain the long-term stability of public finances and preserve the ability to pursue a counter-cyclical fiscal policy, it seems more rational to maintain the current level of the base oil price,” the experts write.

“Since the beginning of the special operation, the discount has grown from a few US dollars to the level of $30-$35 per barrel. The expected decline in the price of Brent oil from the current about $100 per barrel to about $60-65 per barrel, which we expect, should also lead to a significant reduction in the discount … in proportion to the price reduction oil, a reduction in the discount will leave it at around $20 per barrel, which will set the price of Urals oil at $40-45 per barrel, which is close to the base oil price under the current budget rule ($47 per barrel in 2025),” analysts say.

The volume of oil indicated by the Ministry of Finance at 9.5 million barrels per day, according to the authors of the document, looks realistic only on the horizon until 2025, but already on the horizon until 2030 it seems to be slightly higher than the equilibrium. According to Rystad Energy in the note, by 2030 the volume of oil production in Russia will drop to 8.5 million barrels per day due to the impact of the global energy transition, as well as due to reduced access of Russian oil companies to modern technologies.

In the new realities, analysts believe, it is necessary to reduce the volume of oil production used in the calculations. As an alternative, they suggested keeping the current mechanism, which does not record oil production to calculate basic oil and gas revenues.