The Sunset Of The Oil Era Brings Bad Prospects For Russia

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Includes: ERUS
by: Oleh Kombaiev

Summary

Changes in the structure of Russian exports is not pointing to a decline in the role of oil in the country's economy.

Russia’s manufacturing industry has been declining for 13 consecutive months.

In the long run, Russia does not expect a significant recovery in oil prices.

When at the end of 2014 against the backdrop of the first wave of oil prices reduction the ruble was depreciating at a record pace, the Government of Russia was pushing for economy restructuring in order to reduce its dependence on oil prices. It was over a year ago, but, in my opinion, the situation is still the same and the dependence of the Russian economy on the oil market remains unchanged.

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As of Q3 2015 (the latest consolidated data), the total exports of Russia in monetary terms fell by 35.96% y/y, reaching $ 91.96 billion. At that, the share of crude oil and oil products totaled 39.56%. For comparison, in Q3 2014 a similar share in Russian exports amounted to 50.22%. At first glance, the structure of the balance has improved, but only at first glance.

In physical terms, the export of crude oil in Russia amounted to $ 244.5 million tons in 2015 and 223.4 million tons in 2014. It means, the oil exports increased by 9.4% over a year. While exports of goods and services in monetary terms dropped in Q3 2015 by 25% y/y and 26% y/y respectively. Thus, we can conclude that the decline in the share of oil in the overall export structure is associated exclusively with the falling oil prices, but not with the increased share of other items.

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Source of data: Bank of Russia

In the current conditions of partial economic isolation of Russia the export-oriented parts of the industry have no opportunity to take advantage of the cheap national currency. As a result, the industrial production in Russia has been declining for 13 consecutive months. The index growth of industrial production by 1% y/y in February 2016 g is due solely to the effect of a leap year. In that month Russian plants worked 1 day more than in February 2015.

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Source of data: RBC.ru

Fixed capital investments fall more than by 8% y/y starting from December 2015, and it indicates the absence of reasons for the growth of the industry in the foreseeable future.

Hence, the export of oil and oil products remains a key income item for Russia. So what will be the outcome 20, 30, 50 years from now?

According to the long-term projections of Energy Information Administration, the era of oil and gas as the main source of energy has passed its peak. By 2080, the humanity will satisfy more than 50% of its needs from renewable sources.

I'm inclined to trust such projections for two reasons.

Firstly, on a global scale, the price comparison of 1 kWh of the electrical energy, obtained from solar energy sources, and the electrical energy, generated by the traditional methods, indicates the approximation of solar energy to a profitable level. This means that the emerging markets such as China and India will increasingly resort to the use of renewable energy sources in order to meet their growing energy needs.

Source: solarfeeds.com

Secondly, the transportation accounts for an estimated 30% of the current world oil consumption. Nowadays the difference in the cost of an average electric car and a gasoline car of a similar class pays off in approximately 5-7 years. Therefore, it is not advisable for consumer to invest in a relatively expensive electric vehicle. However, the situation is changing. The new electric car Tesla (NASDAQ:TSLA) Model 3, the release of which is announced for the end of 2017, by its price parameters is included in the range of the average cost of a car in the United States. If the price of electric cars equals to the price of the petrol car, the choice will clearly be in favor of the former. And this is not a long-term but a short-term perspective.

In my opinion, there is no doubt that Russia has found itself in a deep systemic crisis caused by the heavy reliance on the oil market. In addition, this situation has exacerbated by geopolitical risk factors and reciprocal sanctions. The running program of import substitution, aimed to support the national manufacturer, does not give effective results because of the fall in consumer demand.

Oil remains a key source of revenue for Russia. While, in my opinion, there is no hope for the fast recovery of oil prices, neither in the short run nor in the long run.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.