Coronavirus: The oil-dependent economies pushing through emergency economic measures
Sky's Ian King examines the extraordinary steps being taken by nations dependent on their oil wealth as COVID-19 hits hard.
Monday 11 May 2020 19:56, UK
The oil price war instigated by Saudi Arabia in March,聽in response to Russia's refusal to implement the production cuts the Saudis were seeking, looks more damaging by the day.
The fall-out is landing in all directions, including on British pension funds and others who own shares in oil majors such as Royal Dutch Shell, but is also hurting the two protagonists themselves.
The extent of that damage has been spelled out during the last few days in policy responses in both countries.
In Saudi Arabia, the government announced that it was raising the rate of VAT from 5% to 15% as it seeks to rebuild its finances, which have been hit by the collapse in crude prices.
Riyadh's oil revenues during the first three months of the year were down 24% on the same period in 2019.
The Saudi government also announced on Monday that it was suspending, from 1 June, the monthly allowance of 1,000 riyals (£216) paid to all of the state's estimated 1.5 million employees to help meet higher living costs.
Other austerity measures introduced include cuts to capital expenditure at some government-owned companies. The amount of money earmarked for the government's ambitious project to modernise its economy, Vision 2030, has also been trimmed.
In all, the measures are expected to bring in around $26.6bn per year.
Mohammed Al-Jadaan, Saudi Arabia's finance minister, said: "The COVID-19 challenges have led to a decline in government revenues and pressure on public finances to levels that are difficult to deal with later without harming the Kingdom's macroeconomics and public finances in the medium and long term.
"The measures taken today, though painful, are necessary and will facilitate financial and economic stability."
The move comes after the Central Bank of Russia said on Friday that it was contemplating another big cut in interest rates.
The bank last month reduced its main policy rate from 6% to 5.5%, a level not seen since February 2014, but its governor, Elvira Nabiullina, said she could not rule out taking that down to 4.5% next month.
Russia's economy is expected to contract by 8% this year, reflecting not only the extent to which it depends on oil production but also the damage inflicted by COVID-19, which has already claimed the lives of more than 2,000 Russians. The country currently has the second-fastest rate of new inflections in the world after the United States.
In a separate but related development on Monday Russia's president, Vladimir Putin, made a televised address to the nation in which he unveiled a number of measures to support the economy.
These included tax reliefs to support specific companies and new welfare payments targeted at struggling families.
Mr Putin, who was announcing an easing of lockdown measures, said the Bank of Russia and the government would be working together to come up with measures to support lending to individuals and businesses once Russia had emerged from the lockdown.
He added: "[It is recommended] that the Bank of Russia and the government jointly approve an action plan for the rapid introduction of online technology in the financial sector, providing the possibility for the remote provision of services by lending and other financial organisations, including those related to the conclusion of loans and mortgages."
Russia has been burning rapidly through the $570bn "rainy day" fund that it accumulated when oil prices were higher. An estimated 40-45% of Moscow's revenue comes from oil and, when oil is trading at $45 a barrel, the budget balances. Anything significantly below that spells trouble.
Anton Siluanov, the finance minister, said last week that this year's budget deficit was likely to be around 4% of Russian GDP - compared with the surplus of 0.8% that was expected this year and the 1.8% surplus the government enjoyed last year.
The Saudis and the Russians are not the only economies to have pushed through extraordinary measures in recent days.
Shinzo Abe, the Japanese prime minister, announced that his government could introduce a second emergency budget as the world's third largest economy seeks to stave off the impact of what is expected to be a severe recession.
The government announced an £890bn stimulus package last month, dominated by cash handouts to households and loans to small businesses, only for MPs in Mr Abe's ruling coalition to demand further spending.
The new measures are expected to include subsidies to companies whose sales have fallen, support for businesses struggling with rental payments and money for students that have lost their part-time jobs.
Meanwhile, Nigeria - like Saudi Arabia and Russia, another major economy whose fortunes depend heavily on the oil price - is bracing itself for a flood of money to leave the country. The Central Bank of Nigeria has raised eyebrows in recent days by continuing to allow investors to take their funds out of the country despite a shortage of dollars.
Yet the move ought not to have come as a surprise. Nigeria needs to maintain the confidence and support of international investors and any curbs on the ability to take money out of the country would have hit that.
The situation in which it finds itself, as with Russia and Saudi Arabia, highlights the need for all three countries to diversify their economies and reduce their dependence on oil.