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Russia to bounce back from low oil prices?

Perhaps the largest recent development in the oil and gas industry has been the fall in global oil prices. This has caused many analysts to spell doom and gloom for the industry, particularly in Russia where the economy is heavily supported by energy production. Russia is one of the largest producers of oil in the world, so surely the falling cost of the product is a major problem?

While nobody is saying this is a positive development for Russia, the truth is a lot more optimistic than initial impressions made it seem. Action will need to be taken in order to protect the nation's economy overall, but the many Russian oil companies should be able to weather this storm and bounce back easily.

The situation is much less simple than "falling oil prices = falling profits", after all. There are a number of other factors that overall mean the drop in oil prices is not as bad as many initially thought. Here are the three major aspects of Russian oil production that will prevent the price decrease from being a disaster:


A strong starting position

The main concern when oil prices drop is that the companies producing the substance will end up going out of business. However, that does not seem to be an issue here, as Russian firms are in such a strong position that the cost of oil would have to fall dramatically to have an impact on them.

A recent Goldman Sachs report outlined this. The company's estimates put the combined cash position of the companies it covers at over $90 billion, of which around $64 billion is excess. The expected debts the firms will have to pay in 2015 are around $40 billion, so there is more than enough money to go around.

In fact, Goldman Sachs estimates the oil price could fall as low as $40 per barrel before the companies would be at risk of going out of business. This is unlikely to occur, so they should be able to make it through 2015 with no major issues.

Continued production

It is a fallacy that a drop in oil prices will lead to decreased production. That is a risk, but in this particular case it is not going to happen. A slowing down of activity could cause a vicious cycle of declining revenue leading to even less production, but this will not be the case in Russia.

The country's energy minister Alexander Novak has already confirmed that the nation will not be cutting production. He said: "If we cut, the importer countries will increase their production and this will mean a loss of our niche market. We plan to preserve the plan for 2014 production without any increase or decrease."


Helpful taxation

Finally, there is no risk of the Russian firms having their credit ratings lowered; at least not according to global leader in this field Fitch Ratings. The organisation's report, entitled 'Stress Testing Russian Oil and Gas', has shown that the low oil prices should not have an affect on any Russian business' credit rating.

This is largely due to the flexibility of the companies financial position, largely due to Russian taxation. Essentially, as the price of oil drops so does the tax rate for oil companies in the upstream sector, meaning the cost gets absorbed in part by the government. This may change in the near future, but for now it is a helpful policy.
As a result, Fitch said the credit ratings, as measured by net leverage, of Russian oil companies "should remain acceptable for the current rating levels". This means the financial impact of low oil prices is not likely to be as large as was first expected.

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