Low oil profits, sanctions and structural problems have got Russia’s economy stuck in a crisis; their emergency reserves are drying up. Still, the conflict with the West could escalate.
Russia is increasingly suffering under an economic crisis. Last year economic performance dropped by 3.7%, and the International Monetary Fund is expecting a further drop of about 1.8% this year, DW reported.
There are a whole series of problems: first, oil prices dropped by more than half in the last year. The country and companies alike are faced with remarkably lower revenues.
“Low oil and natural gas prices make it extremely difficult to finance the budget,” said Stefan Meister, Russia expert at the German Council on Foreign Relations, a Berlin-based think tank. The government, he said, can only plug the budget deficit if they draw from asset reserves, which were built up years ago from the booming profits that came from the energy market.
Western economic sanctions in response to the annexation of the Crimean Peninsula and the conflict with Ukraine have added to the pressure. They have caused trade to collapse, which has also put a pinch on key sectors in Germany, like automobiles and heavy industry. More painful for Russia is the difficulty it faces in finding financing for investments due to the sanctions.
Financing Problems
“Western sanctions have taken away the possibility for our banks and companies to borrow money from abroad, not only in Europe but also all over the world,” said Wladimir Milow, director of the Moscow-based Institute of Energy Policy, in an interview with DW. “No one is loaning us money any more, not even China.”
Milow is also founder and top executive of “Democratic Choice,” a Russian opposition party.
Loans taken out in the past ten years are said to have laid the foundations for Russia’s economic growth. Through the sanctions, said Milow, the volume of credit has been narrowed from $700 billion down to $470 billion.
The tremendous capital flight has also led the country’s currency, the ruble, to lose half its value against the US dollar.
Add to that the structural problems. The Russian economy is dominated by a few large companies in the energy sector, which essentially do the bidding of policymakers. “The premise of competition and rule of law is missing,” Meister told DW.
These problems, according to energy expert Milow, were already noticeable back in 2013, before the sanctions and the decrease in oil prices. “Even back then, the Russian economy did not generate any growth. It is dependent on a few state monopolies that aren’t efficient. And then add the sanctions and sinking oil price on top of that, and these three factors give us no hope of a return to economic growth in the foreseeable future.”
Budget Deficit
The big question is: when will Russia run out of money? Back in January, Russian Finance Minister Anton Siluanov said that the funds in state reserves could be used up by the end of the year. Then the government would need to tap into the national welfare fund in order to curtail the budget deficit. The welfare fund was likewise set up as an emergency reserve in 2008.
If oil prices do not increase, Russia could feasibly carry on “two or three years,” according to Stefan Meister. But, at some point, “the train will hit a wall.” Even so, a change of course in the Ukraine conflict in order to end western sanctions is not something to be expected, Meister said.
In fact, the opposite may be true: the conflict with the West could increase. “The regime would try that in order to distract from the economic crisis,” said Meister. “It would rather create more conflicts internationally than to compromise, or push through reforms.”
