Russia’s fortunes are sinking, in line with the dropping price of oil, not at all helped by international sanctions. Experts who track Russia say Vladimir Putin is facing an economic emergency. The predict he has an 18 month window to stabilize his economy, which is not doing well, according to a story in Monday’s The New York Times.
With oil and gas prices plunging internationally, Russian tax revenues are plunging fast. Putin’s strategy to weather the economic storm appears to be to cut ten percent off the nation’s spending and to rely on their oil reserves, hoping that oil prices will eventually recover.
According to The New York Times, “Russia has around $360 billion in foreign currency reserves and some $120 billion in two rainy day funds, down from just under $160 billion a year ago. At current spending rates, however, the two funds are expected to last only 18 months. It might also sell significant stakes in state-run companies like the oil giant Rosneft or Sberbank, and it will not increase military spending.”
50 percent of Russia’s federal budget is paid for by income from international energy exports. With export prices falling, the nation’s economy is dangerously vulnerable, especially considering their relationship with Assad of Syria is getting more expensive and relations with Ukraine remain tense.
As the world’s second largest supplier of crude oil after Saudi Arabia, Russia should be doing well, especially as it produced a record 11 million barrels per day, in 2015. These numbers are impressive, but with world oil prices going down the toilet, their massive production levels are doing them little good.
In 2015, Russia’s economy last year fell by 3.9 percent and inflation jumped up to 12.9 percent. Putin tried to convince Russians that 2015 would be the worst part of the recession. He also said the collapse of oil prices could be an “opportunity” to wean Russia off energy imports and diversify the economy.
Those thoughts may be overoptimistic.
After making this prediction oil prices continues their fall, dropping below $30 per barrel in January. At the same time, the ruble hit a record low of nearly 85 to the dollar. It has since recovered slightly. The Times reported, “The last time oil prices dropped so low and stayed there, in the 1980s, the Soviet Union disintegrated. Steadily rising prices since 2000 have lifted Russia out of poverty and economic chaos, buoying the prosperity of many Russians with it. Putin was lucky enough to be president for much of that period, but he now faces an extended decline, with real incomes shrinking.”
I don’t know how he knows this, but billionaire George Soros says Russia’s international reserves are sufficient in the near future, even under an unfavorable economic environment. We are in that environment now, and it remains to be seen whether their reserves will last them for two years, as their costs increase.