12/31/2015

What is ahead for Russia

As you read this, please keep in mind that the price of oil from the Urals was down to $34.58 at the end of 2015.  With price of oil down from the $50 per barrel that the Russia government was predicting when they drew up spending for 2016, the deficit will have grown from 3% to 4% of GDP, but that assumes a constant GDP.  Assuming that GDP falls by 10 percent (given that the current oil price is the best predictor of what it will be and the numbers given below), that implies that the deficit will rise to 4.4% of GDP.  A 10% further drop in GDP as well as the costs of the war in Syria and the large military expenditures by Russia, could greatly reduce per capita real income.  Interestingly, unlike US policies, the Russian government has dramatically cut back on government spending.  Otherwise, they would be even much worse shape.  Note this recent drop is on top of the 50% drop that had occurred in 2014.  From the WSJ:
After plunging from more than $100 a barrel to nearly $50 a barrel last year, U.S. oil prices fell 30% in 2015 to $37.04 a barrel. Brent, the global benchmark, fell 35% to $37.28 a barrel.
From the UK Guardian:
Vladimir Putin goes into 2016 with record approval ratings but the shakiest economic outlook since he took charge. In the 15 years he has been at the helm, 2015 was the first year that real wages registered a decline, something that did not happen even during the 2008-09 financial crisis. 
Oil and gas exports make up about half of the Russian budget, and the rouble ratehas been strongly linked to the price of oil. . . . 
The [Rubble] regained some of its value by spring, but falling oil prices in autumn have caused it to fall back to lows similar to those it experienced in late 2014. . . . 
Last October, Putin said that if the price of oil fell below $80 a barrel, the world economy would crash. A range of other top Russian officials made similar statements, in effect ruling out the possibility that oil could fall below $70. 
Some analysts say the rouble is still overvalued, and the current oil price should theoretically push the rouble down further. This is necessary to balance the budget: the fewer dollars Russia receives for the oil it sells, the higher the exchange rate needs to be for the budget to receive the requisite amount of roubles. For the budget to balance at 65 roubles, not far off the current rate, the price of oil should be $70, a recent Bank of America Merrill Lynch report found.  
For ordinary Russians, it could be a tough year ahead. Those who were used to travelling abroad have already had to scale back as the rouble made the cost of visiting foreign cities prohibitive; and rising food prices have made it harder to balance the books for many families. 
The 2016 budget, fixed in October, requires oil to be at $50 in order to run a 3% deficit within “acceptable” rouble rate limits, meaning if the price does not rise soon, cuts will need to be made or reserves spent. The war in Syria is an extra cost, and the announced increases in military spending are not likely to be reversed. . . .
Some other somewhat out of date data is here:
When oil prices drop, Russia suffers greatly. Oil and gas comprise over 60% of Russia's exports and make up over 30% of the country's gross domestic product (GDP). The effect of the 2014 oil price collapse on Russia's economy was fast and devastating. Between June and December 2014, the Russian ruble declined in value by 59% relative to the U.S. dollar. At the beginning of 2015, Russia, along with neighboring Ukraine, had the lowest purchasing power parity (PPP) relative to the U.S. of any country in the world. A declining PPP lowers living standards, as goods purchased using the native currency become more expensive than they should be. Moreover, Russia does not receive much of an economic benefit from lower pump prices as the U.S. does, as Russians consume much less oil and gas than Americans. Less than 30% of the Russia's oil production is kept for domestic use; the rest is exported. . . . 
Some graphs here show how much the value of the Rubble has fallen relative to the US$ since the beginning of 2014 and 2008.
Here is the drop in the Rubble even compared to the EURO.


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