Outlook for Retail Fuel Prices in Russia amid Double-Digit Inflation and Low World Oil Prices

CEIC Russia Data Talk - June 8, 2015 The annual retail price inflation for gasoline has slowed between November 2014 and April 2015 against a background of higher inflation in Russia. The moderation in gasoline price inflation from 9.4% year-on-year (YoY) to 5.4% YoY during this period, and from 5.7% to 3.8% for diesel fuel, is in contrast to price growth accelerating from 9.1% to 16.4% for all goods and services during the same period. In absolute terms, average automobile gasoline prices have decreased from RUB 33.71 per litre in November 2014 to RUB 33.17 per litre in April 2015, while retail diesel fuel has seen a marginal increase from RUB 34.26 per litre to RUB 34.45 per litre in the same period. The drop in the average Urals crude oil price by 45.7% since mid-2014 to USD 59.16 per barrel in April 2015 has had detrimental effects on the Russian budget, which remains largely dependent on oil revenues. Mainly caused by the falling oil price, the depreciating rouble, which has further been weakened by Western sanctions on Russia as a result of the conflict in Ukraine, has pushed the country into the grip of recession. Russia depends on imports for major consumer goods, such as food and clothing (19.4% of total imports in 2013), and machinery and equipment (47.6% of total imports in 2014). The low purchasing power of the rouble, coupled with the skyrocketing prices caused by the trade sanctions, and the diminishing export oil revenues have aggravated the contraction of economic activities. A similar situation was observed during the previous protracted fall in oil prices in the second half of 2008. Nevertheless, despite the substantial crude oil price fall of more than 62% from July 2008 to April 2009 and the sudden real effective exchange rate drop of 18.9% (November 2008-February 2009), inflation remained around 14% and the economy plunged 7.8% in 2009. According to the IMF’s forecasts released in April 2015, inflation is projected to average 17.9% by the end of 2015, and slow down to 9.8% in 2016. The country’s GDP growth, however, is expected to continue its contraction in real terms by 3.8% in 2015, and a further 1.1% in 2016, a considerable contraction but still quite far from the 2009 crisis levels. Forecasts by 2020 do not exceed 1.5% annual GDP growth. One of the main factors contributing to the moderate inflation in fuel prices on the domestic market since the beginning of the year, despite the spike in overall consumer price index inflation, has been the reduction of excise duties on all types of gasoline and diesel fuel produced in Russia, introduced in January 2015. Since excises contribute for almost half of the retail fuel price, this measure served to ease the burden on oil companies that have suffered from Western sanctions on export, reduced domestic demand and low world oil prices. The excise tax was reduced by 14.3% for class 5 gasoline (a measure of emitted pollution) to RUB 5,530 per ton, and by 27.6% for class 5 diesel fuel to RUB 3,450 per ton (classes of fuels which are produced in the largest quantities). Second in terms of production are gasoline and diesel fuel class 4, which underwent excise tax reductions of 26.4% and 36.4% respectively. The reduction of excise duties was carried out for the first time since July 2012, in contrast to the previous drop in world crude oil prices during 2008 and 2009 when the domestic excise taxes remained unchanged. The decrease in domestic fuel demand from industrial and transport companies is partly due to seasonal factors, but for the most part it is caused by the general economic crisis. Retail gasoline sales decreased steadily from August 2014 to February 2015 with the exception of December 2014 when there was a speculative surge in car sales due to the rouble depreciation. The largest drop in retail gasoline sales occurred in February 2015, amounting to 11.3% on a monthly basis. The reduced world crude oil prices together with a lower-value rouble push producers in the Russian oil market to lower their output and encourage manufacturers to export petroleum products rather than sell them on the domestic market. The share of gasoline exports to total gasoline production dropped from 21.5% in April 2014 to 4.7% in November 2014, before rebounding to 14.2% in March 2015. The share of diesel fuel exports to total diesel production (most of which is traditionally exported) also rose from 52.6% in September 2014 to 65.8% March 2015 (export volumes increased by 38%), after reaching a 73.6% high in February 2015. The expected increase in the export price of crude oil along with the declining oil export duties (set by the government for May at RUB 116.5 per ton) should increase total crude oil export volume, leading to a reduced supply of fuel in the retail domestic market. The export price of crude oil after export duty has increased from RUB 215.9 to RUB 277.3 per ton for the period from December 2014 to March 2015, and is likely to trigger a rise of retail fuel prices despite the cheap oil on the world markets. By Evgeny Shlyakov - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
8th June 2015 Outlook for Retail Fuel Prices in Russia amid Double-Digit Inflation and Low World Oil Prices

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