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Crude Economics
Drop in Oil Prices Hurts Russia More Than Sanctions

Russian Finance Minister Anton Siluanov announced that the combination of western sanctions and falling oil prices will cost Russia between $130 billion and $140 billion a year. Reuters reports:

“We’re losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 percent,” [Siuanov] told a news conference.

“The main issue that affects the budget and economy and financial system, this is the price of oil and the fall in monetary flows from the sale of energy resources.”

Official forecasts suggest Russia’s gross domestic product is likely to be around $1.9-2.0 trillion this year, at average exchange rates.

Siluanov’s estimate of the cost of lower oil prices is in line with analysts’ rule of thumb that each $1 fall in the oil price lops around $3 billion off export earnings. The oil price has slumped from nearly $115 per barrel in June to around $80 now.

Oil and gas account for around two-thirds of Russia’s exports, making the balance of payments highly vulnerable to oil price falls.

The most notable thing here is that according to the new official Russian figures, the energy prices are hurting Russia much more than the sanctions are. On November 14, we charted Russia’s breakeven oil price, and how far below that global prices now are. But these official figures suggest that Russia’s economy will take an even bigger hit than previously thought.

That said, some argue that the falling value of the ruble may well be mitigating the pain. Reuters:

Natalia Orlova, chief economist at Alfa Bank, said the $90-100 billion estimate did not take into account the effect of the weakness of the rouble, partly caused by the fall in the oil price, which would help to compensate the loss by boosting exports and curtailing imports.

The rouble has lost 25 percent of its value against the dollar since June, and Orlova said the net impact of lower oil prices on the economy would be around $40 billion.

Either way, the Russian economy is in bad shape, and it’s the falling energy prices that are doing the lion’s share of the damage.

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  • Joe Eagar

    The problem with relying on devaluation is that it must be supported by fiscal policy. By itself, nominal devaluation can only temporarily boost imports, as inflation will offset the change in the real effective exchange rate. Thus the need to boost national savings via tighter fiscal policy (this is arguably what the U.S. has done over the past five years, devaluing and cutting fiscal deficits at the same time).

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