Russia being pushed into the abyss of an economic crisis
THE PRICE of oil, Russia’s main export item, is speeding downhill – economic sanctions the West imposed on Russia as punishment for welcoming Crimea and its people back home are still there.
The rouble keeps losing value daily. Moreover, economic reforms, which many experts say have long been vital for easing the economy’s dependence on the export of fossil fuels, remain mostly on paper.
The combination of these and other factors is steadily pushing Russia into the abyss of an economic crisis.
After two years of feeling euphoric over Crimea’s reunification with mainland Russia and caring little about the effects of sanctions, Russians now tend to give more thought to the economy than geopolitics. Small wonder, though.
The price of each item on sale is steadily on the rise. During the new year holidays, Russians spent 28 percent more on celebrations than they did in 2014.
Many have begun to stash cash for a rainy day. The group of Russian consumers who have now set their eyes on less expensive goods reached a record high of 70 percent in the last three months of 2015.
For the time being, most people plan to cut spending on dining out, electronics and travel, but some have already begun to look for cheaper food. Real incomes are falling and prices have been up 25 percent over the past two years, while salaries and wages (their dollar equivalent) have slumped 40 percent. During the “affluent” 2000s, when the price of one barrel of crude was way above $100, Russians used to spend lavishly. Now they have begun tightening their belts.
Poverty growth and unfavourable demographic trends (the economically active population is shrinking while the army of retirees is growing) are the key structural problems of the Russian economy, Russia’s economic guru Alexey Kudrin, a former minister of finance, warned several days ago.
According to official statistics, the number of people with incomes below the official subsistence level totalled 14.1 percent of Russia’s population, in contrast to 12.6 percent in the same period of 2014. From January to September last year, 2.3 million sank below the poverty line.
“To get adjusted to the crisis many rural residents, in particular those in remote provinces and in the countryside, are increasingly reliant on their backyard vegetable gardens. Growing more potatoes is the easiest solution. People are trying to survive under the circumstances,” says the regional programme director of the Independent Institute of Social Policies, Natalya Zubarevich.
Other alternative ways of earning cash fast, such as taxi cabbing or doing odd jobs at construction sites and on the farms, are no longer as effective as they used to be. “The crisis has hit both the official and shadow sectors of the economy real hard,” Zubarevich said.
Russia’s oil blend, Urals, was trading at about $27.4 a barrel last Tuesday – a level last seen in February 2004, while the spot price of Brent was at $29.1 a barrel. In the meantime, Russia’s federal budget for this year had been drafted on the assumption that the annualised oil price would average $50.
The decline in energy prices that has lasted since November will strip the federal budget of about 300 billion roubles in the first two months of this year. The prices of many other Russian export raw materials, including metals, are sliding downwards.
The national currency, the rouble, has followed the price of oil and nosedived. On average, the rouble last year (in contrast to 2014) lost 37.4 percent against the dollar, and 25.2 percent against the euro.
The authorities are getting ready for the worst. Last Wednesday, Russian President Vladimir Putin advised the government to closely watch the commodity and stock markets and to keep handy all scenarios that the Russian economy might follow. At the same time, he said: “This does not mean that we must change something right away.”
Prime Minister Dmitry Medvedev had warned that Russia should prepare for the worst, if oil prices kept falling. He acknowledged that Russia had never before confronted a synergy of “challenges to its economy as strong as those it is faced (with) these days”. However, the situation was “controllable” for now.
The government is going to cut budget spending (this year’s original budget draft envisaged a 3 percent deficit) by 10 percent this year. The indexing of social benefits will be slashed, and wage indexing cancelled altogether. Last year, the budget had to be sequestrated by 10 per- cent. First Deputy Prime Minister Igor Shuvalov has asked government ministries to draft different scenarios their subordinate industries might use in a situation where one barrel of Urals oil would be trading at $25, $35 and $45.
The state defence contract is certainly an obvious reserve, agreed Nazarov. “A country that has found itself in a situation like Russia’s cannot afford to spend 4 percent of the GDP on defence,” he said.
Privatisation can become another source of income, because the state is ineffective in managing its own assets.
Also, Nazarov would “raise the retirement age without any hysteria”.
“In any case, there is no fast solution of the budget deficit problem, because for the past five or six years we have been inflating our own spending,” he said.
Kudrin is certain that only economic growth of no less than 5 percent a year will help. To achieve it, investment must be encouraged. Dmitry Polevoi, chief economist at the ING bank, agrees it will be futile to expect economic growth as long as there is no understanding where the country is moving and what the government’s priorities are.
Analysts say several probable points of growth are agriculture, infrastructure, logistics, and competitive innovation.
It is to be hoped this time the economic crisis will force Russia to get rid of its oil addiction.