Financial Problems in Russia
Oil plays a special role in the world's economy. As a fossil fuel and as a lubricant, it is needed worldwide. Some countries, like China, which has a growing consumer class, need more of it every day. But, in the same way that a salesperson should not rely on just one big account, oil export countries run the same risk when there are falling prices. If your main export is oil, you depend on demand and higher prices, to keep revenues up.
The decreased demand for oil, along with sanctions for its incursion into Ukraine, are impacting the Russian economy and causing its leadership to reach out to Western leaders. Increased inflation and a substantial decline in the value of the ruble all add up to woes for the country when it needs to borrow money. Experts predict that lower oil prices could send the Russian economy into a budget deficit in 2015.
In addition to the sanctions and oil prices, capital investment in Russia is drying up. Investors are taking their funds elsewhere. The Russian ruble plunged 80 percent against the dollar in mid-December. Although the currency has since stabilized somewhat, the decline is expected to push inflation in 2015 to 12 to 15 percent.
Sanctions have stung Russia in several ways. A large project by Russia's biggest oil firm, Rosneft, to develop Arctic offshore oil deposits with partner Exxon Mobile, was snuffed because of sanctions. Also, a deal that was in the works to acquire an oil trading business from Morgan Stanley, ended abruptly when U.S. regulators refused to approve it.
Because of production costs, Russia needs to earn $100 a barrel or more just to balance the budget. This figure is only $95 a barrel in Saudi Arabia, where production costs and domestic spending programs are lower. The Russian government and the Russian Central Bank believe that there will be a rebound in prices that favor them in the near future, but that is looking out at a three-year time horizon.
Rough Road Ahead
The country is rich with natural resources, but a lack of a modern manufacturing sector, has limited the products it can export. Eighty percent of exports consist of natural gas, oil, timber, defense equipment and metals. The government ran head on into this same problem in 1998, but has not acted to modernize manufacturing since then.
Even after anemic growth in 2014, some economists are predicting that Russia's GDP could actually fall by 3.6 percent during 2015. Russia's
former finance minister, Alexei Kudrin, blamed the country's government for not acting fast enough to address the mounting problems. He forecasts that many Russian companies would default on obligations in 2015 and that Russia's debt would be downgraded to junk status; something that it is close to already.
The former finance minister also predicted that if oil prices hover around $60 dollar a barrel in the new year, Russia's GDP could decline by four percent or more. This could spell a pronounced recession for the country.