Oil prices have been following a downward trend
Energy prices have been largely following a declining trend since mid-2014. From over $100 per barrel, Brent oil (BNO) is currently under $40 per barrel. Also, natural gas is down from over $4.50 per MMT (million metric British thermal units) to about $2.00 per MMT unit.
The decline in oil prices is a result of the price war between US (SPY) shale oil producers and OPEC (Organization of the Petroleum Exporting Countries), where each is pumping oil into the market—leading to oversupply—in an attempt to retain market share. The price war has impacted Russian energy companies and Russia’s economy at large.
Russia is a major oil exporter
Russia (RUSL) is home to the largest mineral and energy reserves, and it ranks high in the list of major oil- and natural gas–producing countries in the world. The dip in energy prices has deeply impacted the Russian economy’s revenues.
The Russian government derives about 50% of its budget revenues from oil and natural gas industry taxes. About 25% of the country’s GDP is linked to the energy industry. Oil exports form the backbone of the Russian economy. With the oil price drop, the revenues of Russian oil firms such as Rosneft (OJSCY), Lukoil (LUKOY), and Surgutneftegas (SGTZY) have taken a hit.
Moreover, Asia and Europe are two important markets for Russia. Asia and Europe accounted for 98% of Russia’s energy exports in 2013. With demand conditions low in China and Europe, energy exporters in Russia have to tackle more than the declining energy prices.
Exporters in Russia, along with financial institutions, are also being impacted by the sanctions that have been imposed by the West.