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Conflict, collapse and coronavirus in Russia

The decline that began in late February accelerated during March. It is clear that the coronavirus will affect everyone and that all the world’s markets are hostage to the virus. In addition to affecting human health and behaviour, the measures that authorities feel forced to take have enormous consequences for global economic activity.

Although Russia is not yet one of the most affected countries, the impact of reduced economic activity is noticeable. The price of oil, which is so important to Russia, has fallen tremendously, partly because of the fall in demand due to steeply reduced global economic activity, and partly because of the conflict between Russia and Saudi Arabia within OPEC+, which has meant that oil prices could no longer be protected.

Russia’s departure from OPEC+ was mainly because Russia did not want to see any further cuts at the moment, while Saudi Arabia wanted large cuts. Russia felt the situation was uncertain because of the coronavirus and that it would not be possible to protect the price with cuts right now. It therefore wanted to take a more long-term perspective in order to fend off new volumes in the future.

The situation degenerated into a pure price war and the collapse of oil prices. However, Russian oil companies are quite strong in this situation. They have low production costs and little or no debt. American shale oil is worst placed. At the end of March, President Trump spoke to President Putin about how to stabilise the oil market. The conversation resulted in each country’s energy ministers taking over the discussion and trying to find a solution. My guess is that the Russians will demand that the United States take its share of production cuts in line with OPEC+ and that sanctions will also be eased. Both will be difficult for Americans to stomach.

At this moment, Russia has just over 1,000 diagnosed cases of Covid-19, but the actual number is probably significantly higher. Russia has already blocked international traffic and is also severely limiting people’s mobility in the hope of reducing the spread. Like most countries, Russia will also support businesses with government measures to mitigate the economic impact.

 

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Carnegie Rysslandsfond invests in equities listed in Russia and in other parts of the former Sovjet Union. The region has great natural resources as well as many excitingcompanies in newer...

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