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Russia's Economy Suffers Double Hit from Oil Slump and Coronavirus

05/20/2020 | 08:15am EDT

By Thomas Grove and Georgi Kantchev

MOSCOW -- Few Russian companies have taken the hit from lower oil prices and coronavirus lockdowns as badly as Rosgeologia, one of the biggest exploration firms here.

At the beginning of the year, it was eyeing around $400 million in new oil and gas contracts. But since then, those tenders have been canceled or put off until prices recover, and the company is selling millions of dollars in assets to maintain its cash flow. Quarantine measures to stem one of the world's largest virus outbreaks outside the U.S. could also disrupt its supply chains and visits to drilling sites across the country, said spokesman Alexander Shadrin.

"If we're talking about the crisis in oil, here the situation is even more complicated," he said.

The slump in Russia began in March, when coronavirus lockdowns in China and elsewhere pushed oil prices lower. Russian President Vladimir Putin's hesitance in joining Saudi Arabia and other big producers to curtail output compounded the problem, driving oil to its lowest price in more than two decades before recovering slightly.

Now the economic pain has spread as infections balloon, and Russia, dependent on oil revenues for a third of its state budget, finds itself poorly-equipped to offer the sort of economic support programs provided in the West.

"The epidemic has hit the economy hard," Mr. Putin acknowledged in a videoconference with regional governors.

Russia has recorded 308,705 coronavirus cases, the world's second-largest tally after the U.S., and 2,972 deaths as of Wednesday. Unemployment has doubled to 1.4 million since early April, and Mr. Putin has warned the worst has yet to come. The coming recession could exceed the slump in 2008 to 2009, he said, which ended a decade of oil-fueled growth and slashed the nation's gross domestic product by 7.8%.

The economy minister, Maxim Reshetnikov, has estimated the lockdown costs Russia's economy $1.3 billion each day in lost output, while the country's purchasing managers index, a key measure of economic activity, slumped in April to its lowest level since records began in 1997.

The fallout is now threatening Mr. Putin's long-term plans to strengthen Russia's economy and buttress his own dwindling approval ratings through a $400 billion series of infrastructure projects such as new highways and high-speed rail lines. The government has said the scope of the National Projects, as they are known, will have to be adjusted, though insists they will go ahead just as Mr. Putin lays the ground for a series of constitutional changes that could enable him to stay in power until 2036.

PIK Group, Russia's biggest developer, expects to play a leading role in the building program, which includes nearly 250 million square feet in new housing across the country this year. But quarantine measures temporarily halted all construction in Moscow and the surrounding area, and the company expects revenues for the sector to be down 50% to 70% in April, traditionally one of the strongest months for house sales, and the picture could get worse.

"The biggest fear is whether homeowners will be able to service their mortgages," said Yuri Ilyin, PIK's vice president in charge of capital markets and corporate finance.

The double-hit of lockdown and lower oil prices already is exacerbating old problems of poverty and falling living standards.

To alleviate the pain, Mr. Putin last week said the government will offer tax breaks and subsidize loans to businesses as well as offer additional payments to families with children.

Another problem is that lower oil prices have hit not only Russia's budget and the value of the ruble -- one of the world's worst-performing currencies this year -- but also the $165 billion National Wealth Fund, built up over years of stable oil prices. Lower prices mean smaller contributions to the fund and officials have been cautious about how they use it, given the uncertain outlook for oil prices. They have drawn down only $26 billion so far.

"Putin is very reluctant to dip into the welfare fund," because it is largely used to pay state pensioners, a core constituency, said Leon Aron, director of Russian studies at the American Enterprise Institute, a think tank in Washington, D.C. "If he's serious about [using it], the welfare fund will melt very quickly."

While larger state-backed oil companies are able to absorb the hit, smaller firms, which produce around 4% of Russia's oil, are on the verge of ruin. According to Russia's Association of Independent Oil and Gas Producers, 128 out of 132 independent companies risk going bankrupt. The sector as a whole accounts for more than a million jobs in Russia.

Some banks, meanwhile, worry how the oil slump and the broader pandemic will affect the wider economy. Andrey Kostin, president and chairman of state-owned VTB, Russia's largest lender, has been pushing the government to borrow more aggressively to support businesses and people by compensating them for lost income. Russia's fiscal relief program totals around 2.8% of GDP whereas the U.S. measures make up around 11%, according to the International Monetary Fund. Russian officials have said that they would increase the package.

Tatiana Schepina, 37, who organized concerts for disabled children from Russia and Europe, was left without a job after her biggest sponsors all withdrew their funding in early April. Since then, she has been trying to make ends meet to feed her nine-year old son and make the monthly $170 payment on her car.

"The bank calls every day threatening to take the car back," she said, adding that she's taken to asking on social media for food handouts.

In a further sign of trouble for Mr. Putin, sweeping lockdown orders to curb the coronavirus have triggered protests among Russians scrambling to make ends meet.

"People are already pushed to the limit...[they are] at the end of their rope," said Yegor Pospelov, head of the regional branch of OPORA, a pro-business nongovernmental organization in the city of Kirov in western Russia.

In Moscow, Ramil Uruzayev, 32, says he can last another month keeping the 50 employees who work in his restaurant furniture cleaning service. When his biggest customer, Burger King, closed its doors he was stuck without cash and by law needed to pay the salaries of his employees, which he has continued to do.

Mr. Uruzayev says he's scraping by with a fraction of his usual $80,000 monthly revenues. But he's still paying $8,000 in rent, and a weaker ruble also has made the cleaning supplies that he uses a fifth more expensive.

"How can you run a business in these conditions?" he said.

Write to Thomas Grove at thomas.grove@wsj.com and Georgi Kantchev at georgi.kantchev@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
AT HOME GROUP INC. 2.94% 36.76 Delayed Quote.137.77%
EURO / RUSSIAN ROUBLE (EUR/RUB) -0.36% 86.6586 Delayed Quote.-3.06%
LONDON BRENT OIL 0.87% 74.44 Delayed Quote.43.56%
PIK-SPECIALIZED HOMEBUILDER -0.28% 1084.1 End-of-day quote.81.32%
US DOLLAR / RUSSIAN ROUBLE (USD/RUB) 0.07% 72.5037 Delayed Quote.-2.16%
WTI 0.98% 72.23 Delayed Quote.50.22%
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