Energy prices next test for Russia’s shaky growth

Half of budget revenues due to energy exports

The economy of the world’s biggest energy exporter is heading for its deepest slump in more than 10 years due to the fallout from the coronavirus. A bigger crisis may be just around the corner.

Analysts at the Kremlin-funded Skolkovo Energy Centre warned this month that the nation faces years of economic stagnation as demand for its carbon-heavy exports gradually drops. If Russia doesn’t adapt, budget receipts will “decline drastically” and growth may be limited to less than 0.8 per cent a year for the next two decades, less than a third of what the Economy Ministry is targeting.

President Vladimir Putin has relied on high oil prices as a backstop for economic growth — and his own popularity ratings — for most of his two decades at Russia’s helm. Now forecasters expect that the coronavirus recession will accelerate the decline in global fossil fuel use, with some even predicting that the peak was in 2019, about 15 years earlier than the Kremlin was expecting.

“Oil and gas are becoming just commodities, without the resource rents that were the main driver for the Russian economic miracle at the beginning of this century,” Tatiana Mitrova, director of the Skolkovo Energy Centre, said by phone. The coronavirus crisis has likely made the think tank’s economic forecasts even bleaker, she said.

The Kremlin is showing no signs that it plans to move away from the current economic setup, under which almost half of budget revenues come from energy exports. Just this month, Rosneft chief executive Igor Sechin boasted to Putin about progress made at an Arctic oil exploration project and Gazprom began design and survey work on a new pipeline to China.

Crude prices have collapsed about 45 per cent since the start of the year as coronavirus lockdowns sap demand. Although the market has rebounded in recent weeks, the price of Russia’s export blend of Urals crude is still well below the US$42 a barrel needed to balance the Russian budget.

“The rents that we enjoyed for the last 20 years will never come back,” Alexei Kudrin, the respected former finance minister and now a top government auditor, warned in an article in the Kommersant daily Monday. “That’s a huge challenge for all of economic policy.”

The International Energy Agency forecasts a plunge in global oil demand of 8.6 million barrels a day this year, or about nine per cent, while solar and wind demand increase. The European Union, Russia’s biggest export market, wants to put a Green Deal to become climate-neutral by 2050 at the heart of its plan to recover from the coronavirus pandemic.