The Russian current account at $150-180 a barrel oil

Is driving up the price of oil really a good way of hurting the Russian economy?

Today the Biden administration announced that it would be banning imports of Russian oil and gas. It is not clear what this will achieve except disruption to the oil and gas markets. Russia and China today announced even more cooperation on energy policy. So, oil that is not sold to the United States will find a buyer elsewhere.

Generating disruptions to the energy markets, however — especially with a war in Ukraine and rising inflation — will only exacerbate energy price hikes. It is hard to say how high oil prices will go, but I heard speculations today of anywhere between $150 a barrel to $180 a barrel.

Here’s what I find confusing: how would this hurt Russia? Russia is, famously, an energy exporter. They beneifit from higher energy prices. Indeed, some make the case that in the Russian intervention in Ukraine in 2014 the Obama administration cleverly brokered a deal with the Saudis to crash the oil price. Whether or not that happened, it makes sense to me as a strategy to penalise Russia — which is why I wrote about it a few months ago. Lower oil prices hurt Russia, higher prices help them. Obviously.

Let’s turn to take a look at how rising energy prices will impact the Russian economy in the next year. First of all, let’s get a feel for their balance of payments. The chart below shows both net exports and the current account balance (both as % of GDP).

Here we see that net exports are higher than the current account. This means that the other component of the current account — net income receipts from abroad — are consistently negative for Russia. More on this later.

Next we seach for a nice correlation between exports and the oil price. This is not hard to find and can be seen below.

Now we can take two projections of the oil price for the end of 2022. I use $150 a barrel and $180 a barrel. We can then use this to forecast Russian exports for the year relative to GDP.

As we can see, in either of these scenarios we should roughly see a doubling of exports-to-GDP in Russia. As the chart shows, such an increase would be unprecedented historically.

Finally, we can use these export figures to provide forecasts for the Russian current account balance.

These are insane numbers. According to these forecasts, if Western policies juice the oil price to $150-180 a year, Russia should be seeing a current account surplus of anywhere between 20% and 25% of GDP. Most countries would do anything short of ceding territory to achieve this sort of current account balance.

That current account projection assumes that all else holds equal. But all else will not hold equal. For one, Russian imports are likely to fall because Western companies are boycotting the country. Russia has also frozen its stock market, so the amount of income flowing abroad should fall too. So, these estimates are likely conservative.

This strategy on the part of the NATO allies is incomprehensible to me. It is obvious that Russia will be the beneficiary of rising energy prices and oil importers will pay the cost. From the above analysis we can see just how much the Russians would beneifit from oil at $150-180 a barrel and the answer is: a lot. If these prices are reached Russia will have a trade balance that will be the envy of the world.

Perhaps someone else can explain to me why these policies will hurt Russia? Comments open. Even highly speculative comments welcome. Because I am completely bewildered.