Low oil prices drain Rus­sian pur­chas­ing power

The Washington Times Weekly - - Geopolitics - BY MARC BENNETTS

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.

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