Oil decoupling creates stress test for imperilled Russian economy

Untethered from oil, Russia’s traditionally boom-and-bust economy is finding little else to power growth. After retooling its budget and currency for an era of depressed crude prices, the world’s biggest energy exporter is failing to feed off the rally that took oil to a four-year high earlier this month. Now a sluggish post-recession upturn has given way to stagnation, with Goldman Sachs Group Inc estimating gross domestic product even contracted slightly last quarter in seasonally adjusted and annualised terms.

Worse may be yet to come as structural issues go unaddressed, especially with the lurking threat of more US sanctions. The economy is at risk of grinding to zero growth next year, according to Igor Nikolaev, director of strategic analysis at FBK, an audit and consulting firm in Moscow. “A slowdown of economic development is underway,” he said. “Growth factors are lacking. Old structural problems aren’t resolved.” Faster expansion is vital for President Vladimir Putin’s ability to deliver on his campaign promises to improve living standards. Economy Minister Maxim Oreshkin is still holding out hope that a pickup in growth will materialise this quarter. Even so, the government expects GDP gains will slip to 1.3% next year from 1.8% in 2018.


An oil worker inspects a pumping jack during drilling operations in an oilfield operated by Bashneft in Russia. Untethered from oil, Russia’s traditionally boom-and-bust economy is finding little else to power growth.

Petrodollars aren’t finding their way into the economy because the government currently diverts its windfall revenue from oil prices above $40 per barrel to reserves under the so-called budget rule. A value-added tax increase and plans to increase the retirement age also threaten to cripple consumer spending. The latest estimates by state development lender Vnesheconombank show monthly GDP, adjusted for seasonal factors, contracted in June and August and had zero growth in July. Benchmark Brent – which trades at a small premium to Russia’s Urals export blend – has gained about 17% this year to just under $80 a barrel.

Some traders have forecast prices will return to $100 a barrel soon as the Organisation of Petroleum Exporting Countries struggles to fill a supply gap.Were it not for the budget rule, Russia would have been the world’s biggest beneficiary from oil at that level, according to Oxford Economics.Confidence is flagging after Russia’s economy failed to sustain momentum following a growth spurt last year and a brief boost to household finances around presidential elections in March. The outlook is increasingly in question after a smaller harvest and the disappointing performance of investment, industry and consumer spending.

Russia can expect little in the way of monetary stimulus. Interest-rate cuts may not resume for more than year after the central bank shifted to tightening last month. All but two analysts surveyed by Bloomberg predict its benchmark will be kept at 7.5% at a meeting this Friday. The Bank of Russia’s research and forecasting department says the economy still eked out seasonally-adjusted growth of 0.4% in the third quarter, projecting a slight slowdown but no contraction in the coming months. It’s warned, however, that a deceleration of the global economy in recent months may “negatively affect” Russia.

The same budget safeguards that protect Russia from falling oil prices are now blunting any positive effect for the economy, said Evsey Gurvich, head of the Economic Expert Group, which is a consultant to the government.“Oil no longer works as a driver of growth,” he said. “And no other drivers have yet been created.”

Sources and photo-credits: Bloomberg, Gulf Times