Oil price hike pressurises external accounts
Overview:
While the economy maintained positive growth in 2009 and the authorities remain on track with the IMF program, successive price increases for Russian oil imports are exacerbating an already weak external position. The new price of oil agreed this January, in particular, poses a large adverse shock to both the external and fiscal accounts. The current account deficit is already large, FX reserves fairly modest and external debt rising. Thus, the authorities are being forced to devise a suitable adjustment strategy. This includes offsetting fiscal measures, a weaker exchange rate and further restrictions on the amount of directed lending by the state-owned banks. This will help ease the problem in the short-run. However, the implementation of structural reforms is the only long-term solution to the falling Russian oil subsidy.