Low oil prices drain Russian purchasing power
MOSCOW | Irina Tashaeva, a 35-year-old housewife, has made a habit of checking world oil prices as she sits down to breakfast in her Moscow apartment.
“I never used to pay any attention at all,” she said. “But now I realize that the price of oil is directly linked to how well my family lives.”
Ms. Tashaeva is not the only Russian with both eyes on the global market for oil, which has fallen in just 12 months from $104 a barrel to around $50.
Oil and gas form the backbone of Russia’s economy, accounting for 75 percent of exports and over half of the revenue for government coffers. For every dollar the oil price falls, Russia loses out on $2 billion a year in revenue, analysts say.
Russia insists it will not slash production to boost oil prices, but that still means an era of effectively lower take-home wages and higher prices for ordinary consumers.
“If we cut, the importer countries will increase their production and this will mean a loss of our niche market,” said Energy Minister Alexander Novak.
For years, steadily rising oil and gas revenue allowed the Kremlin to dramatically increase living standards. In exchange, voters mostly turned a blind eye to President Vladimir Putin’s clampdown on dissent. This unspoken agreement between Mr. Putin and the Russian people was known as “sausages for freedom.”
Low oil prices, combined with tough Western sanctions over the Kremlin’s actions in Ukraine, mean Mr. Putin is struggling to keep his end of the bargain. Last month, Russia’s economy entered a recession for only the second time since 2000. The economy shrank by 4.6 percent in the second quarter of the year, while retail sales were off 8 percent compared with the same period last year.
These grim economic figures have had a direct effect on the livelihoods of millions of Russians. In July, Olga Golodets, the deputy prime minister responsible for social affairs, stated that 23 million Russians — 16 percent of the total population — were living below the official poverty level of less than $170 a month. This is a rise of 3 million people in 12 months.
On top of this, inflation is rampant — food prices rose 10.6 percent in the first seven months of this year. Some staples, such as buckwheat, at times have disappeared from the shelves entirely. The ruble, strongly linked to the price of oil, has dropped about 45 percent against the dollar this year and was pummeled again during last week’s global market scare.
That is having a direct impact on Ms. Tashaeva and other Russians at the grocery store.
Russian retailers are facing pressure to hike prices on imported goods such as fruit and vegetables from suppliers in Turkey and Latin America, Bloomberg News reported Monday.
“Purchasing power has weakened, and a step-up in food inflation could cause difficulties for Russian consumers,” Jan Dunning, chief executive of Lenta Ltd., one of Russia’s biggest supermarket chains, told Bloomberg.
One result is that Lenta and other big retailers are trying to shift to domestic-made substitutes to counter the higher-priced imported goods. Group Auchan SA, a top rival of Lenta, is opening a meat processing plant about 400 miles south of Moscow next week. Clothing retailers face a similar bind. Prices for foreign-made clothing and shoes could jump by 20 percent this month because of the rapid ruble devaluation, according to a survey from the Fashion Consulting Group. Medium- and upper-priced lines will show the most dramatic jump, according to the survey, The Moscow Times reported. Several foreign brands, including U.S.-based American Eagle Outfitters and Germany’s Adidas, have either sharply cut back operations or left Russia altogether as the ruble has tanked.
Seeking new customers
Shunned by Western customers, Mr. Putin is making a concerted effort to enlist new allies and find new friends. Moscow and Beijing signed a 30-year, $400 billion oil and gas deal to supply the booming Chinese market. China earlier this year surpassed Germany to become Russia’s single biggest buyer of crude oil.
A Kremlin aide told reporters in Moscow on Monday that Mr. Putin will meet up with Venezuelan President Nicolas Maduro — whose own heavily energy-dependent economy has been blindsided by falling global prices — when the two are in Beijing next week for the 70th anniversary celebrations of the end of World War II in China. The Wall Street Journal said the two will discuss “possible mutual steps” to “stabilize” global oil prices and discuss coordinating Moscow’s production with that of OPEC.
Although Russia built up a massive sovereign wealth fund, the Reserve Fund, during the years of high oil prices, it has already been forced to dip into this to cover shortfalls. Finance Minister Anton Siluanov has warned that if Russia does not reduce its budget deficit, it could soon use up the entire rainy-day fund.
Critics say Mr. Putin failed to use the years of high oil prices to undertake the modernization of Russia’s resources-reliant economy. They accuse him of spending on vanity projects such as the $50 billion Sochi Winter Olympics and the 2018 soccer World Cup, and siphoning off millions more to his business friends.
As living standards decline, the Kremlin has promoted a rise in aggressive anti-Western attitudes. Mikhail Fradkov, head of Russia’s Foreign Intelligence Service, has accused the U.S. of manipulating oil prices in an attempt to stir up public protests that would force Mr. Putin from office.
“No one wants to see a strong and independent Russia,” he said. Opposition politicians worry that Mr. Putin could launch another military adventure like the one in eastern Ukraine to distract Russians from their country’s growing economic problems.
Although Mr. Putin’s approval ratings remain sky-high, many commentators are concerned about impending instability as a result of Russia’s growing economic woes.
Russia marked the one-year anniversary this month of its ban on Western agricultural products with an order to destroy contraband food. Some Russian farmers and retailers have thrived from the Kremlin’s controversial ban.
President Vladimir Putin has a tacit agreement with Russians linking oil to living standards.