Russia’s two trillion dollar economy, the eighth largest in the world, is buckling under the combined weight of ongoing financial sanctions imposed by the West and falling commodity prices, especially the price of oil.
According to the World Bank, Russian economic growth this year is expected to be less than one percent. Inflation is running at eight percent annually and rising. The ruble has lost nearly 20 percent of its value this year against the dollar and euro.
Russian businessmen and investors are taking notice; capital flight from Russia so far this year has reached at least $75 billion.
Perhaps the most ominous sign for Russia’s financial interests is the sharp decline in crude oil prices. As recently as this summer, the price of the benchmark Brent (North Sea) crude oil hovered near $105 per barrel. This week it had slipped to slightly above $92 per barrel.
This is good news for consumers at the gas pump but a major challenge for the Kremlin. Unlike most of the world’s large economies, during the Putin era Russia has failed to diversify its economy. Its vast natural energy resources contribute as much as 75 percent to the Russian government’s budget.
High energy prices also underpinned major Kremlin initiatives such as Putin’s promise to modernize the Russian military, a lengthy and expensive process. The Russian budget needs oil to sell at or above $100 a barrel to keep from slipping into the red, but most experts expect oil prices to remain low for the foreseeable future.
Numerous factors in the global economy are at work lowering oil prices. Saudi Arabia is planning to keep production high. U.S. oil production is likely to continue increasing because of growing use of hydraulic fracturing (fracking) to access new oil and gas deposits. Moreover, should the international community reach an agreement with Iran on its nuclear program, sanctions on Iranian oil exports almost certainly will be reduced or ended, possibly adding as much as another million barrels of oil a day to global totals.
Other factors also are in play. Large parts of the global economy, including in Europe, have yet to fully recover from years of depressed performance, suggesting that a major spike in demand for oil is unlikely next year.
Russian President Vladimir Putin has approached Russia’s mounting financial problems with his usual mixture of bluster and bravado. Speaking in late September at the VTB Russia Calling Investment Conference, Putin described as "utter foolishness" the imposition on Russia of Western sanctions. He added that there was nothing the West could do to force Russia into "a new period of isolation" or prevent Russia "from becoming an economic power."
It is far from certain that Putin’s speech, aimed at placating nervous Russian businessmen and investors, will have its desired effect. Coming months will show whether the flight of capital will continue or subside, a critical indicator of Russia’s future financial fortunes.
Some of the signs are not good. Already major Western investment firms such as JP Morgan Chase and Goldman Sachs are reviewing the future of their operations in Russia. Even Alexei Ulyukayev, Russian minister of economic development, has warned of additional capital flight this year.
Putin shows no sign of allowing Russia’s mounting financial troubles to undermine his determination to maintain Russia’s hold on Crimea and destabilize Ukraine. His tough talk is being backed by draft legislation known as the Rotenberg law, a reference to Russian businessman Arkady Rotenberg who had four villas seized by Italian authorities. In its current form, the legislation says that Russians who lost money or property as a result of Western sanctions—described in the legislation as "the unlawful decisions of foreign courts"—could be reimbursed by the Russian government.
The legislation, which will likely pass in the Duma, is the clearest indictor to date that Putin has every intention of maintaining the support of his powerful cronies.
Other parts of the draft language would allow Russia, in retaliation for Western sanctions, to seize Russia-based assets of foreign countries that have sanctioned Russian citizens. If implemented, the legislation could move Russia’s clash with the West from Ukraine to new legal and financial battlefields.