The Russian Economy
On January 21, 2016, the ruble dropped to more than 85 to the dollar, although it rebounded by summer to 65 to the dollar. Russia’s economy, which is heavily dependent on oil and gas, had a difficult 2015, as the price of oil fell from its mid-2014 peak of over $100 a barrel to less than $40 and led to a collapse of exports and government revenues. The Economist estimates that GDP shrank by nearly four percent, inflation ran close to 13 percent, the ruble lost halfits value against the dollar in the second halfof2014 and then dropped a further 20 percent in 2015 (‘Russia’s Economy’ 2016).
According to the assessment of The Economist, the worst is over for the Russian economy. The turbulence in the oil market has led to a new reality, that the energy-driven growth model has been exhausted. Russian businesses seem to be doing slightly better than when the crisis first started and their foreign debt has fallen by a third since 2014. The banking sector is looking better as well, thanks to certain policies implemented by the central bank. The big oil companies have coped with a weak currency since their operating expenses are priced in rubles but most of their revenues are in dollars. Total oil production in Russia grew by 1.4 percent in 2015 which reached record highs and oil giants such as Rosneft, Lukoil, and Bashneft made higher profits than in 2014 according to Moody’s. The government’s situation is not so rosy though, as the mid-2016 price of oil at $30 a barrel would lead to a deficit of about seven percent. If the government runs out of ready cash, Putin may be tempted to print rubles which would boost inflation and would sap the purchasing power of Russian firms and families. The cuts in government spending that have resulted from the drop in the price of oil have led to the decline in quality of life for ordinary Russian citizens. Real wages fell by an estimated nine percent in 2015 and four percent in 2014, the first dip since Putin came to power in 2000. GDP per person is down from a post-soviet peak of close to 15,000 in 2013 to around 8,000 this year. More than two million people fell into poverty in 2015. Spending has dropped significantly as retail sales declined 13 percent in November and foreign travel dipped by 30 percent. In addition, the price of heroin has doubled in the past year. Foreign direct investment fell from $40 billion in early 2013 to 3 billion in the second quarter of 2015. Agricultural output is stagnant. The first most dramatic phase of Russia’s crisis may indeed be behind it, but for ordinary Russians the next phase will not seem much better (Russia’s Economy 2016; Focus Economics 2016a, 2016b).