Russia is planning for low oil prices for years

Vladimir Putin in 90 Seconds
Vladimir Putin in 90 Seconds

Russia is betting oil prices will stay low for a long time.

President Vladimir Putin's government has just set a draft budget for the next three years based on the assumption Russia will be able to sell its oil for $40 a barrel. That's $10 below current world prices.

Russia is the second biggest oil exporter after Saudi Arabia. It has been talking to the Saudis and other OPEC producers about restraining supply to support prices.

Putin's budget suggest he wants to be prepared if a preliminary OPEC production cut agreed last month is not implemented, or proves ineffective.

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He may also have learned a painful lesson. In 2015, the Russian government originally based its budget on an average price of $100, double what it actually was.

The slump in oil prices forced the government to slash spending. That hurt everyday Russians, who were already struggling with rising prices and falling wages. Some even took to the streets in rare public protests.

Related: Russia is seriously running out of cash

The budget for 2016 predicted $50 oil, $10 above the average price in the first nine months of the year. And once again, the government was forced to change its plans.

It amended the budget earlier this month, to accommodate higher defense spending and a one-off bonus for pensioners to be paid in January. That will push up borrowing: the budget deficit is now expected to reach 3.7% of GDP, well above the official target of 3%.

The government is now expecting the deficit to fall to slightly above 3% of GDP next year.

Prime Minister Dmitry Medvedev said on Thursday Russia cannot afford to continue living in debt, and ordered more spending cuts. He wants the deficit to be less than 1.2% of GDP by 2019.

But Putin is up for election in 2018 in the middle of the budget cycle, and that will limit the scope for spending cuts or tax increases, said Anna Zadornova, an economist with UBS.

putin russia reserves

Related: Russia's economy has been in recession for 18 months

Russia desperately needs to get its finances in order, because its cash reserves are being depleted at a rapid rate. Analysts expect the country's rainy day fund will shrink to just $15 billion by the end of this year and dry up completely soon after that. It was $91.7 billion in September 2014, just before oil prices started to collapse.

Experts are skeptical whether the country will be able to stick with the plan. "Russia's inability to stick to a fiscal plan even over the course of several months undermines the spending and deficit targets for 2017 and beyond," analysts from the Eurasia Group wrote in a note.

Russia is trying to become less dependent on oil and gas. Energy now accounts for 37% of all government revenues, compared to roughly 50% just two years ago.

Eurasia Group analysts say the government is still opting for more austerity rather than genuine economic reform.

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