Home > Blog > Recent Decline of Oil and the Ruble Weigh Heavily on Russian Economy

Recent Decline of Oil and the Ruble Weigh Heavily on Russian Economy

Roughly two weeks ago Russian President Vladimir Putin stormed out of a G20 Summit meeting amid a barrage of criticism from fellow leaders, most notably German Chancellor Angela Merkel, over his recent military intervention in Ukraine. Putin has been taking heavy blame for his actions concerning Ukraine, which began with the interruption of a pending EU-Ukraine trade deal and soon escalated into the deployment of Russian troops in Ukraine and the annexation of Crimea. Putin’s latest aggressions stem from a desire to reunite Eastern countries to combat the growing influence of the West, and has been met with heavy sanctions by the latter. Banks have applied constraints to a growing number of Russian businesses, and not only Putin’s close friends (who comprise a disproportionately large amount of the nation’s wealth), intensifying the impact of Western sanctions, according to The Economist. However, the crippling effect of these sanctions is only one of many economic problems facing Russia today – threatening to take them from economic stagnation to full-scale recession.

In addition to sanctions, the oil-reliant Russian economy has suffered a great deal from the recent 30% drop in oil prices, as energy exports account for over half of the government’s revenue. Although Putin remains confident in Russia’s economy, the recent decision by OPEC not to cut output levels, the growing production of U.S. shale, and Japan’s slide into recession all point to a continual price fall and subsequent economic dilemma. Historically corresponding to oil prices, the ruble (the Russian currency) has also collapsed, depreciating roughly 20% against the dollar in only one week. Decreasing its purchasing power, the ruble’s recent plummet has driven up the prices for Russia’s imports, a country that has raised its imports by $300 billion since the turn of the century, according to The Economist. The depreciation also weighs heavily on Russian banks and other firms who, operating on their home currency, face the burden of more expensive outstanding debt. Not to mention, firms have been effectively cut off from Western capital markets following the Ukraine crisis and subsequent sanctions-implementation. Faced with this oil crisis, like many other oil-reliant nations, these sanctions come as extremely problematic, as Russia has enough economic woes to deal with. Yet however desperate to resume normal international trading, Putin seems determined to continue intervention in the Ukraine, shedding light on the underlying problem at the heart of its economy: the gradual return to Soviet-like authoritarianism.

In an appearance on CNN International last week, Mikhail Zygar, EIC of the independent Russian channel Dozhd, detailed recent government crackdowns on the press. Zygar described the gradual narrowing of Russian journalism, comparing the current situation to if the U.S. had only twelve TV stations, which all happened to be Fox News. One of the remaining sources of dissent, Dozhd has been systematically phased out of public television by the government. One of only many authoritarian measures taken by Putin in recent years, this move highlights the larger political scene in Russia, which has been suffocating the economy for years. Through state-run banks, the government has been allocating oil revenues to firms based on their political allegiance. In fact, the majority of projects for the Sochi Olympics, totaling up to $50 billion, were awarded to close friends of Mr. Putin (The Economist). The damaging and unfair effects of economically favoring political allies and close friends through state funds, although not unique to Russia, have intensified the crippling effects of the recent developments above. The government has also acted to infuse capital in struggling firms of friends, hindering free market improvement, as seen in the extremely slow growth and innovation in Russia’s energy sector. The industry has hardly grown in the past years, and other industries have also suffered from the rampant corruption and misallocation of state funds to political allies. Now, with those petro-dollars decreasing, Russian firms will face even greater challenges. Yet with Putin’s tight control on Russia, evident in Zygar’s testimony, public confidence remains with Putin, preventing necessary economic reform.

Smothering political dissent and effectively controlling the public press, Putin has managed to keep the people’s approval on his side. As Mikhail Zygar described in his interview, Russian society is currently poisoned with anti-American sentiment. Reminiscent of the days of the Cold War and under Putin’s tight grasp, the Russian people have returned to the tendency to blame external enemies for shortages and economic troubles. Although sanctions are indeed the product of Western decisions, they come as a consequence for egregious actions taken by Russia in Ukraine. However, sanctions aside, current corruption between the Kremlin and state-owned enterprises has inflated issues surrounding the oil and ruble crash, catalyzing Russia’s dissent into recession. General consensus among experts is that Russia can last roughly two years before crisis, yet Putin’s tight control and hindrance of free markets, free information, and political dissent may prevent any necessary economic reform as he appeals to the anti-Western sentiment of his people. The steady path to recession and possibly crisis has indeed begun.

About Evan Ocko

A junior contributor, Evan is an Economics major from Westchester, NY. Like any ex-high school athlete, he has recently picked up golf and men’s softball to rekindle the glory days.

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