Weakening Oil Price Could Threaten Russia's Economy

Should oil prices drop to $30 or lower in 2016, Russia's economy would be pushed to depths that would threaten the nation’s financial system. With OPEC likely to stick with its strategy of defending market share by maintaining output and driving down higher-cost production elsewhere, a lower oil price remains Russia's biggest near term threat. Interestingly, the Russian central bank recently estimated in a stress-case scenario, with crude below $40 in 2016-2018, the economy will contract 5% or more next year and price growth may be at 7%-9% (raising the risk of inflation and financial instability). With such a bleak potential 2016 outlook, it will be interesting to see if Russia tries to strike a deal with Saudi Arabia to jointly lower production and shore-up the global oil price. One wonders how long both Saudi Arabia, Russia and the OPEC countries will continue to tolerate a depressed oil price.