How Oil Prices Are Crushing the Russian Economy

Over the past eight months, Russia’s stature as a global force has taken a series of economic hits that directly coincide with the severe drop in oil prices. Prior to the development of this situation, Russian President Vladimir Putin’s controversial actions in the Ukraine and Crimea were powered by the revenue that high oil prices brought.

The Ruble’s Slide

However, that slide has resulted in bigger issues back home, most notably the rapid descent in the value of the Russian ruble. An attempt to prop up the ruble by increasing interest rates to 17 percent has proven to be a failure.

That means that the current inflation rate of 11 percent is eating away the small amounts of money that many Russians already earn. That in turn has resulted in bond rating agencies relegating Russian sovereign debt bonds to “junk” status, a dubious distinction that gives a clear example of the depths of this problem.

Top-Heavy Dependence

The heavy dependence on oil and gas and the lethal effect it’s had on the Russian economy can be seen from the simple fact that two-thirds of the country’s exports are based in those areas.

One economist indicated that the Russian economy can only grow if oil prices are above the $92 a barrel range. Based on that statement and given that the actual price has been fluctuating around one-half that amount for a while, it’s clear that the impact is getting close to the start of a recession, if it’s not already there.

Any Recovery Will Take Time

Due to those woes, the economy in Russia is expected to drop by four percent this year, and may not be able to get into positive territory until 2017.

Another bad sign for the country is that its financial reserves are slowly being eaten away by having to take from it to prop up the economy. After the country defaulted in 1998, a process of building up those reserves began.

However, that stopped in 2011 and a greater focus on military spending began, with a 30 percent increase in that department. The subsequent military incursions would then come about, concepts that could confidently be funded as long as oil prices remained high.

Oil Disasters Continue

Given how delicate the current economic situation is for Russia, one of the last things they would need would be some sort of disaster with one of their pipelines. Unfortunately for them, and especially for the environment, that’s already taken place.
Just days before Christmas, a pipeline just outside of Tuapse, Russia burst, which sent a huge amount of oil into the Black Sea. The oil company blamed a landslide for the accident, but regardless of fault, a state of emergency was eventually declared.
In many cases where a disaster like this hits, pipelines can simply become clogged up or develop issues related to the flow of oil within it. That’s why the need for pipeline pigging equipment and service companies like Inline Services can be invaluable, since such products are able to detect and track potential issues before they surface.

A Broadened Outlook

With regard to what lies ahead for Russia, some interesting historical perspective may be in order. That’s because depending on how long it takes the price of oil to rebound to previous levels, this current situation could potentially mirror what took place in the mid-1980’s when the world oil market collapsed.
In that earlier situation, Russia (which was still the Soviet Union) had been involved for years (since 1979) with their military incursion in Afghanistan. That brought with it huge costs to fund the military effort, which lasted until 1989.
When the oil collapse hit, it sent the Soviet economy into a tailspin, and by the end of 1989, the last vestiges of the Soviet Union’s dominance were crumbling one by one.
Déjà vu?
While there’s no indication that Putin will be driven from power anytime soon, especially given his continued popularity—his approval rating most recently was 80 percent, it bears watching to see if history will end up repeating itself.