Russia Heads Toward Recession, With No Relief In Sight

Dec 3, 2014
Originally published on December 3, 2014 11:12 am

Russia's economy has taken a series of heavy hits in the past few months, and now it seems to be in the midst of a perfect storm.

The country depends heavily on oil exports, and prices are down sharply. The Russian currency is losing value fast. And U.S. and European sanctions, imposed after Russia's takeover of Crimea, are biting hard.

President Vladimir Putin remains defiant, saying sanctions will never bring Russia to its knees.

But the pain is real. Russia's Economic Development Ministry said Tuesday that economic growth for 2015, which had been forecast at an anemic 1.2, has been revised downward and the economy is now expected to contract by 0.8 percent next year.

Here are some answers to key questions facing the Russian economy:

Why are falling oil prices having such a negative impact on Russia?

Russia is not the only country heavily dependent on revenues from its oil and gas exports. But some of the others, like Saudi Arabia, have deeper pockets in the form of huge reserves of dollars and euros that can be used to pay its bills when the oil income tapers off.

Economists say Russia needs a world oil price of around $100 a barrel to fund its government spending. When the price falls below that mark, Russia either has to curb spending or run a deficit. Oil prices began falling sharply this summer and are currently about $71 a barrel.

Normally, a little deficit spending shouldn't hurt Russia, a country that doesn't have a lot of foreign debt. But Russia has a lot of demands on its budget right now, including a massive military buildup and support for banks and businesses that are feeling the effects of Western sanctions.

How much are the U.S. and European sanctions contributing to Russia's current problems?

Russia's finance minister said recently that sanctions will cost Russia about $40 billion in lost economic activity if they're extended through next year.

The biggest problem is that the sanctions make it very hard for Russian banks to obtain foreign capital, and for Russian companies to borrow money to finance their operations.

Those banks and the state-owned energy companies are now asking the government to give them money from its reserve funds.

For instance, Rosneft, the big state oil company, is asking for $42 billion. That money would come from Russia's National Wealth Fund, which was originally created to guarantee pensions.

The ruble has also lost more than 40 percent of its value since last summer. How is this affecting ordinary Russians?

A weaker ruble means that imported goods become more expensive. Russia imports about 40 percent of its food, so price increases hit hardest at the grocery store.

In addition, Russia banned most food imports from the United States and the European Union in retaliation for Western sanctions. That drove food prices even higher because it created shortages.

Some regions, such as Russia's Far East, are more dependent on imports, and prices for some items, such as chicken, shot up by as much as 60 percent when the ban was announced.

Overall, though, economists are predicting that prices will be up between 8 percent and 10 percent over the next year.

So far, at least, that loss of purchasing power doesn't seem to be turning Russians against Putin. Support for the Russian president is still above 80 percent. Some analysts say economic hardships will just make the Russian people more defiant, if the government can convince them that they are sharing sacrifices for the good of their country.

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Let's hear about another of the effects of low oil prices. The falling price of gasoline may be good for your commute, but it's not good for everybody. We heard yesterday that small U.S. oil producers are suffering. And so, it turns out, is Russia. Cheap oil is one of several economic problems hammering President Vladimir Putin's country. NPR's Corey Flintoff joins us from Moscow. Hi, Corey.

COREY FLINTOFF: Good morning, Steve.

INSKEEP: And let's just remind people - plenty of supply of oil right now. The OPEC countries - Saudi Arabia and others - have decided not to cut back production and reduce that supply, so prices are going to stay low for a while. What's it mean for Russia?

FLINTOFF: Well, Russia, like Saudi Arabia, is basically a petro-state. And it's really dependent on revenues from oil and gas exports. Experts say that in order to fund all its government spending, Russia needs a world oil price around $100 a barrel. Any less than that and you're running a deficit. As of this morning, oil prices actually recovered a little bit, but they're still just around $71 a barrel. So that's a big hit for the government of Russia, which actually came out and said they expected there'll be a recession next year.

INSKEEP: OK. So a recession could be coming for Russia if they're correct. And you said that they need much higher prices of oil just to pay their government bills. Can their government borrow billions or trillions of dollars the way the United States has?

FLINTOFF: You know, normally a few years of deficit spending wouldn't be a big deal for Russia. It should be in pretty good shape. During the good years, they put aside a big reserve of strong foreign currencies - you know, dollars and euros. And it's supposed to be worth more than $400 billion, so it should be able to use that to pay its bills for a fairly long time. But this comes at a time when Russia's pushing for a big boost in military spending, and it's also hampered of course by sanctions from the West.

INSKEEP: Oh, you're talking about the sanctions that the U.S. and other countries imposed because Russia grabbed Crimea from Ukraine. Are those sanctions having very much effect, really?

FLINTOFF: Well, the finance minister said the other day that sanctions will cost Russia about $40 billion in lost economic activity if they're extended through the new year. And of course government officials tend to lowball those numbers, so it could be a lot higher. The biggest problem for Russia is that the sanctions have made it really hard for Russian banks to borrow foreign capital and also for Russian companies to borrow money to finance their operations. So those banks and the big state-owned oil and gas companies are now asking the government to give them money from the big reserve fund. And that's an expensive proposition.

INSKEEP: What about when you go away from the banks and you're just meeting an ordinary Russian on the streets of Moscow - how's he affected or she affected?

FLINTOFF: You know, yesterday I was in a big mall that just opened in Moscow last weekend. And business was pretty slow there. There weren't a lot of customers. The people we talked to, though, both sellers and buyers, didn't seem to be really worried about it. You know, a lot of people said they haven't paid a lot of attention to the economic news, and those that do say they think it'll all blow over pretty soon. Interestingly enough, though, it doesn't seem to have had a lot of effect on people's support for Putin either or his policy in Ukraine. In fact, it seems to have created a situation where the Russian public is feeling pretty defiant, and they're willing to undergo some hardships to support the country.

INSKEEP: Corey, thanks very much.

FLINTOFF: Thank you, Steve.

INSKEEP: That NPR's Moscow correspondent Corey Flintoff this morning. Transcript provided by NPR, Copyright NPR.