Falling oil prices continue to affect Russian economy

As oil prices continue to fall to 12-year lows in first trading week of 2016, Russia is expected to go through tough days, due to its oil export dependent economy

Photo by: Reuters
Photo by: Reuters

A man walks by a board showing currency exchange rates of the US dollar and euro against the rouble, in Moscow, Russia, December 30, 2015

A plunge in the oil price to 12-year lows during Russia's New Year and Orthodox Christmas break means the country returns to work on Monday with its economic recovery and once-mighty savings war chest on the line.

The equity and currency turmoil in China that rippled through world markets during Russians' 10-day festive holiday pushed Brent crude futures to around $32 a barrel, down from $45 at the start of December and a step closer to the $20 price trough predicted by Goldman Sachs.

Crude's collapse from $100 a barrel since mid-2014 has already pummeled Russia, which relies on energy for about half its budget revenues and 40 percent of its exports. The latest slide compounds the problems facing President Vladimir Putin ahead of elections in 2018.

Due to thin local holiday trading, the rouble fell only 2 percent last week, but the 75-per-dollar rate is not far now from the 80.1 record low hit 13 months ago.

Back then, Russia defended the currency by raising interest rates by 500 basis points overnight; a sharp rouble move lower in coming weeks could force a repeat of that action.

Inflation would surge, and the recession that the government had forecast ending this year would be extended.

In the worst-case scenario with oil staying at or below $30 per barrel, Russia's coffers would empty in just over a year, leaving little to show for a decade of bumper oil earnings.

Borrowing on international bond markets or privatisations are also possible but neither is attractive in view of depressed share prices and high borrowing costs.

Investors' appetite for Russia is further dampened by continuing Western sanctions imposed to punish Moscow's actions in Ukraine, although the sanctions do not directly prevent Russia from borrowing.

The two sovereign funds are already being depleted. In early December, they contained $130 billion, down from mid-2014 peaks around $180 billion. The government also has to find a trillion roubles, some 1.2 percent of GDP, that has been promised to bail out state development VEB.

Many Russians will return from the holidays only too aware that life is about to get harder.

Civil servants' salaries will be frozen for the third year, pensions are to rise less than inflation; foreign goods and vacations will become even more expensive.

The blow to living standards is leading some to draw parallels with Russia's previous financial crisis in 1998, when the government defaulted and the rouble lost three-quarters of its value.