Page 12 - MEOG Week 17

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Iran’s opens borders with neighbours for trade
Iran has said most of its border crossings with neighbouring countries have reopened for goods to pass, but passenger crossings remain limited, IFP reported on April 27.
The announcement came as Iran repatriated more than 30 Iranian nationals from next-door Azerbaijan. Iran’s embassy in Baku on April 27 said that they had become trapped inside Azerbaijan because of border closures performed in response to the coronavirus (COVID-19) fears.
Deputy Foreign Minister for Economic Diplomacy Gholamreza Ansari noted that turkmenistan has shut its borders to all countries, including neighbours and non- neighbours, because of the coronavirus pandemic. he said: “According to the claim
of turkmen officials, there has been no case [of coronavirus] in their country, so they have closed almost all borders to protect themselves against the coronavirus”.
however, reports from Ashgabat in recent days have suggested turkmenistan has quietly opened its border crossings with Iran—there are claims of new Iranian products appearing in the shops of the capital and elsewhere. The turkmen leadership has come under pressure with foodstuffs becoming scarce. Products including biscuits and flour became hard to find.
Ansari added that various missions were holding consultations with host countries to pave the way for the resumption of business travel between Iran and their nations. “We have asked our missions to start negotiations with the local authorities on ways the two sides can figure out to allow for safe travel by individuals,” he said.
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Saudi rival Russia caught out by oil plunge
Did Russian President Vladimir Putin just screw up in a spectacular fashion? Russia pulled out of the OPEC+ production cut deal on March 6, baulking at increasing its cut from 300,000 barrels a day to support prices to 500,000 bpd under the terms of that deal. Many said at the time that the decision was made on purpose to cause the price of oil to fall and so destroy the US shale oil industry that needs prices of oil to be at least $40 per barrel to be economically viable.
The problem is the plan worked too well. First the Saudis flooded European refineries with crude at a steep $8 discount. That effectively locked Russian producers out of the their traditional export market and the price of the Russian Urals blend of oil, which normally trades at a roughly $2 discount
to the benchmark Brent blend, collapsed completely, briefly going negative a full two weeks before the same thing happened to the US WtI blend, where prices fell to below zero on April 20 for the first time in history due to the lack of storage space for May contracts.
The price of a barrel of Urals blend subsequently recovered to $24.55 in the next few weeks, but now there is a lot of confusion over how much a barrel costs. Part of the problem is that while Urals futures can be traded on the St Petersburg international commodity exchange, there are in fact no deals and so no pricing mechanism for futures. The only market is a spot market, but here too the information on the prices used
in deals is not transparent. There have been reports that the price of Urals fell into negative territory again in the last few days to -$3 and other reports that say the price is somewhere around $17 – still a deep discount to Brent
which is trading at about $25 at the time of writing. Confusion reigns.
But whatever the price really is, all the possible prices for Urals are below the $25 that the kremlin seemed to be assuming if
its motive really was to crush the US shale industry. Finance Minister Anton Siluanov came out just ahead of the flash crash of
WtI prices to boast that the RUB12 trillion ($161bn, 11% of GDP) in the National Welfare Fund (NWF), Russia’s sovereign wealth fund, was enough to cover the budget deficit for a decade, assuming average oil prices as low as $25. This year the Ministry
of Finance is expecting there to be a RUB3 trillion hole in the budget (a third bigger than the RUB2 trillion hole it had in 2014 during the last oil shock) but that there was no need to cut spending, as the missing money could be sourced from the NWF. At that burn rate there is enough in the NWF for four years – and that is before the kremlin starts cutting spending or raises the very low tax rates on companies and citizens.
But this plan doesn’t work if average oil prices are zero, or even if they are, and stay at, $15. In the days after the crash of WtI prices Siluanov was out in public again to manage expectations and dramatically walked back his previous confidence, saying that Russia would have to spend half of the money in the NWF just this year (6.8% of GDP) to cushion the shock from the double whammy of the oil price collapse and the stop-shock caused by the coronavirus (COVID-19) pandemic.
“Demand for oil in April and May could
be down by as much as 20 or 30 per cent, while the overall decline in 2020 will be 5–7 per cent, according to various estimates.
This means that in six to eight weeks, storage facilities could be full, pushing oil prices even lower than the record lows seen recently, when the price of Urals crude fell to about $10 a barrel,” says Marcel Salikhov, an analyst with the Carnegie Moscow Centre.
If the MinFin really does need RUB7 trillion years of budget deficit cover and stimulus spending then the NWF will be exhausted before the end of 2021. Given the government’s previous form in prior crises it is very clear that the kremlin will not run down its reserves because they play a key strategic role, as they make Russia Inc. sanctions proof. If Russia has to go into the international debt market to raise significant amount of cash
to fund deficits it becomes vulnerable to sanctions and Putin simply won’t go there.
In this light it was no surprise that the kremlin decided to eat humble pie and signed off on a new OPEC++ production cut deal that will reduce production of oil by 9.7mn bpd on April 13. Under the terms of the new
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Week 17 29•April•2020