If the oil duel intervenes between President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, who has a more rigid financial backbone, it is the ruble that could help get Russia to the finish.
While Saudi Arabia has the lowest production costs and more spare capacity, it has little to do with Russia's shock absorbers in its variable currency. As a bar of stability that has been pegged to the dollar for over three decades, the rial is more of a straitjacket when oil prices go bust.
"A flexible exchange rate gives Russia an advantage over other raw material exporters in times of fluctuations in oil prices," said Elina Ribakova, deputy chief economist at the Institute of International Finance. "Saudi Arabia has its hands tied."
The collapse of the production pact between OPEC and Russia last week shook the oil market and put the finances of raw material producers in the spotlight. Saudi Arabia escalated a price war in an attempt to flood the market with crude oil, and used its ability to lower prices and gain market share with higher production than Russia. Russia's top producer, however, replied to the plan to boost production as well.
As the fiscal challenges determine how long Saudi Arabia and Russia can stand a sharp drop in oil prices, especially if the outbreak of the corona virus slows demand, the clock will tick louder for the kingdom. Every day of ruble devaluation gives Moscow more time.
Russia, according to the Treasury Department, has an additional income of 70 billion rubles ($ 969 million) for every drop in ruble against the dollar compared to the exchange rate used to calculate the budget. The effect is similar for Russian oil producers, whose spending is mainly in local currency, while the revenue is in dollar.
What our economists say …
"Low oil prices will leave a smaller hole in the budget for Russia than for Saudi Arabia, and the reserves are large enough to fill it. But the buffers are not unlimited and the price shock will still be painful."
– Scott Johnson
Russia's exchange rate has plummeted, down about 5% in the days since Saudi Arabia aggressively lowered its selling prices and production in response to Putin's refusal to curb production, a decrease of almost 4 rubles.
Although a weaker currency will boomerang as inflation and consumer spending power decline, Saudi Arabia's policy of tying the rial will corner it as it explores ways to survive the oil shock.
The protection of the bond is putting pressure on the Kingdom's currency reserves, as dollar royalties are required for each rial and sight deposit in circulation. Adjusted for the tight supply of money, Saudi Arabia had only central bank holdings of $ 343 billion and foreign assets invested through sovereign wealth funds at the end of 2019, according to Ziad Daoud of Bloomberg Economics.
When Saudi Arabia opened up reserves and turned to borrowing six years ago after the oil crash, Russia has opted for frugality since 2017 and stowed away the revenue it can now spend. The Treasury says it can cope with oil for just $ 25 a barrel for the next decade.
Economists are less certain of this and warn that Russia could use up almost all of its wealth funds in about three years. If oil prices stabilize at a lower level, the government could be faced with the option to cut spending or raise taxes.
However, through the order of its financial house, Russia has contributed to its resilience and is less dependent on energy than on the budget of Saudi Arabia. It's an imbalance that could tip the balance in Russia's favor in the long run if the two can't put aside their differences in oil price control.
According to Bloomberg Economics, the kingdom could have a larger budget deficit and absorb the shock to its finances instead of accepting slower growth. According to Bloomberg Economics, the budget deficit could rise to $ 86 billion this year, or 11.1% of GDP if it were $ 40 oil.
Saudi Arabia's bond also means that its current account will underperform Russia's, as a weaker currency will allow Russia to adjust by making imports more expensive. This leaves the kingdom with a choice to pursue much tighter fiscal policies or to rely on loans or reserves to close its external gap.
If the budget deficit is $ 86 billion a year, Bloomberg Economics estimates that Saudi Arabia has enough net international assets to fund its deficits for only four years.
However, the oil showdown is not just a budget math exercise for Saudi Arabia or Russia. Even before the recent market surge, both had sluggish economic growth after a disappointing run in recent years.
Increased oil production could offset the impact on their economies, but the loss of confidence and investment could be a burden in the coming years. It is also a possible setback for Putin's goal of providing fiscal stimulus after years of austerity measures, as spending plans are challenged if oil does not recover.
While the oil crisis will undoubtedly cause economic concerns for both Saudi Arabia and Russia, budget constraints are likely to shorten the kingdom's time span.
"Saudi Arabia is trying to aggressively gain market share, but it cannot last long," said Christopher Dembik, global director of macroeconomic research at Saxo Bank. "Ultimately, Russia is clearly in a better position in terms of the budgetary situation."
(Except for the headline, this story was not edited by NDTV staff and published from a syndicated feed.)