Oil Price Taking a Toll on Russia

RussiaOilPriceChart-2300Michael Birnbaum of the Washington Post reports that the drop in the price of oil is having more effect on the Russian economy than Western sanctions:

Nine months into the worst relations between the West and Russia since the Cold War, the plunging price of oil is causing deeper and swifter pain than the Western sanctions that have targeted key areas of Russia’s economy. Russian leaders said Tuesday for the first time that their economy will head into recession next year. In a nation where oil and gas exports largely determine the bottom line, lawmakers are slashing spending promises. And the ruble is hitting historic lows every day.

The sanctions haven’t moved Moscow much. There has been no inclining that Russian will return Crimea. In fact the extension of Russian control over the peninsula marches on. Nor have they stopped Moscow’s meddling in eastern Ukraine. If reports from the Ukrainian government and NATO are to be believed, Moscow’s been sending a steady stream of weapons and armor over the border in recent weeks.

But the fall in oil prices, Birnbaum argues, “appears to be changing policy calculations far more quickly.” What exactly those changing policy calculations are, Birnbaum doesn’t say. Nevertheless, the Finance Ministry now admits that Russia is on the brink of recession. Indeed, last week Finance Minister Anton Siluanov predicted that the loss of oil revenue will cost Russia $90 billion to $100 billion. The sanctions on the contrary will cost $40 billion. Granted, this number doesn’t include the projected $130 billion in sanctions instigated capital flight.

But this doesn’t mean Russia is on the brink of economic disaster as some suggest. Experts give Russia a year to two years of breathing room.

Some aspects of Russia’s finances still stand it in good stead. The state’s debts are low. Its international reserves were $429 billion at the end of October, down by a fifth since last year’s peak but still enough to hold off major economic calamity for about two years, analysts said. And the ruble’s slide has helped cushion the blow to state coffers, since oil transactions are in dollars: A barrel of oil at $71 on Tuesday actually bought more rubles than it did in July, when oil was $110.

Still the drop in the price of oil, which is currently at $70 (the Russian budget is set at $100 a barrel) is having quite an impact on the Russian economy, as the chart comparing the price of oil with the collapse of the ruble indicates. Russia is looking at tough economic waters ahead, especially as experts predict the low price of oil will continue well into 2015.

Leave a Reply

Your email address will not be published. Required fields are marked *