CIS Economic Update - Impact of Lower Oil Prices on Russia, Kazakhstan, Azerbaijan

The tumble in Brent has sent tremors across financial markets. We have analyzed several economic scenarios with different oil prices for the major CIS oil exporters - Russia, Kazakhstan and Azerbaijan. Russia's macro fundamentals should remain stable even at $35/bbl Brent. On the other hand, Kazakhstan looks vulnerable at such price levels, as higher budget expenditures have pushed the budget's breakeven oil price close to $70-75/bbl and the government is trying to support the tenge. Azerbaijan should be able to cope with low oil prices thanks to its high government reserves, though the manat's peg to the dollar will be hard to defend if Brent drops below $30/bbl. > Russia least vulnerable. The flexible exchange rate, relatively tight fiscal policy due to the budget rule, and accumulated reserves will help to cushion against the oil price decline. The Finance Ministry has said it would start financing the budget deficit with the National Wealth Fund, which it could do for at least seven years at $35/bbl Brent.> Brent at $35/bbl manageable for Azerbaijan, but manat peg to become harder to defend if oil drops further. Last year, the consolidated budget surplus reached 9% of GDP, while Sofaz assets increased to $43.3 bln. The breakeven oil price for the budget remains close to $55/bbl. However, if the average Brent price declines to $35/bbl this year, a deficit of around 10% of GDP could emerge. The oil revenues to Sofaz would shrink and the gap would have to be funded by using the fund's assets, which could drop to $38 bln this year.> High budget expenditures make Kazakhstan vulnerable. The breakeven oil price for the budget is around $70/bbl and the tightly managed exchange rate makes Kazakhstan vulnerable to the oil price shock. To finance the resulting deficit, and to support the tenge, the government will likely use FX reserves (including the National Fund and those at the NBK).