Russia's central bank warns of oil price crash similar to pre-Soviet collapse – Reuters

The warning came a few weeks before US President Donald Trump and Vladimir Putin began negotiations to end the war against Ukraine.

Trump said he could impose additional sanctions on Russia if there is no peace deal. He also promised to increase US oil production and called on OPEC leader Saudi Arabia to produce more oil to help the global economy.

The Russian central bank stated the warning in a presentation prepared for a discussion chaired by Prime Minister Mikhail Mishustin in February.

The central bank, which analyzes economic risks in closed reports at least once a year, did not say under what scenario OPEC and the US could flood the market or how likely these risks are.

In previous reports seen by Reuters, the central bank has cited oil prices as one of the risks to the Russian economy but has never spoken in detail about how a prolonged cycle of low oil prices could occur.

The Ministry of Economy also made a separate presentation to the meeting, mentioning other risks to the economy, such as declining investor activity, rising costs, and “bad debts.”

Although the United States may continue to increase oil production, the lion's share of the increase is likely to come from other non-OPEC producers such as Guyana, Brazil, and Kazakhstan, where the world's oil giants are increasing production.

“A significant risk is the oil price,” says one of the slides, which mentions significant production growth in the United States and non-OPEC nations among the risks.

The document also says that OPEC's reserve capacity is close to a record level and is equal to the volume of Russian crude oil exports.

“Historical precedent – after the period of high oil prices in 1974-1985, 18 (!!!) years of low oil prices,” read a slide of the presentation.

The fall of the Soviet regime with oil prices

For Russia, the world's second-largest exporter, oil and gas have been both a strength and a weakness since the Soviet Union discovered one of the world's largest hydrocarbon basins in Western Siberia in the decades after World War II.

For decades, high oil prices allowed the Kremlin to cushion the effects of a falling economy and spend money on political campaigns abroad, such as supporting governments from Cuba to Angola or Vietnam.

When prices fell, the economy went downhill, with spectacular geopolitical consequences, such as the 1991 collapse of the Soviet Union.

The collapse of oil prices in the 1980s made it impossible for the Soviet Union to compete with the United States in the arms race. Financial problems worsened and led to the collapse of the Soviet Union, an event that Putin has repeatedly described as a tragedy.

Oil prices are currently around $70 per barrel, a comfortable level for Russia, whose budget assumes an oil price of $69.7 per barrel.

Since 1991, Moscow has experienced several financial shocks due to low oil prices. In 1998, it defaulted on its foreign debt after prices fell to $10 per barrel.

In 2008, Moscow had to tap its fiscal and reserve buffers to stabilize the economy and curb unemployment after oil prices plummeted due to problems in the US real estate sector.

Oil prices have also fallen sharply over the past 15 years, including during the coronavirus pandemic, but the short-term nature of the downturn has not seriously tested the Kremlin's resilience.

Earlier this month, Putin spoke with Saudi Arabia's influential Crown Prince Mohammed bin Salman and emphasized the “significance” of the OPEC+ oil deal for the stability of the global oil market.

“The commitment of Russia and Saudi Arabia to comply with the obligations assumed in "OPEC Plus" was emphasized,” the transcript of the phone call reads.

According to the International Energy Agency (IEA), OPEC's total reserve capacity (unused production that can be put into operation) is about 5.3 million barrels per day, which is close to the volume of Russian oil and fuel exports.

Saudi Arabia has stated that it is able to increase production from the current 9 million barrels per day to a maximum capacity of 12 million barrels per day within a few months.

Most Ukrainians (73%) have a positive view of the collapse of the Soviet Union. In Russia, the situation is almost the opposite: 65% of Russians regret the collapse of the USSR.