Lower oil prices push Russia toward recession

MOSCOW — If sanctions, inflation and political risk weren't enough, falling oil prices are pushing Russia's already beleaguered economy toward recession.

The price of Brent crude oil, a global benchmark, hit a four-year low last week, plunging to below $83 per barrel from $116 in June. While it was just under $85 on Wednesday, there is considerable risk it could dip well below $80, costing Russia, whose budget gets half its revenue from oil and gas exports, billions of dollars, analysts said. Geopolitics and oil prices have already reduced Russia's budget by an amount equal to 4% of its gross domestic product.

A loss of "$10 per barrel costs (Russia) 500-600 billion rubles a year" — equivalent to $12.2 billion to $14.6 billion, said Natalia Orlova, chief economist at Alfa Bank, by telephone.

Cheap oil has further devalued Russia's currency, with the official exchange rate falling almost 20% this year to 41.34 to the dollar Wednesday. Months of economic instability largely due to Western sanctions over Russia's incursion into Ukraine have already taken their toll, with the latest round of sanctions cutting off Russian companies from Western financing.

The troubles in Russia — the world's eighth-largest economy — could have global repercussions. Deterioration of Russia's credit could affect the health of some European banks along with economies in Europe and Central Asia that rely on trade with Russia. Economic instability would be particularly risky for Russia itself, where President Vladimir Putin's rule at home owes much to the stability that's come from high oil prices and relative prosperity for the population.

Moody's downgraded Russia's sovereign debt from Baa1 to Baa2, the second-lowest investment-grade rating, on Oct. 17, adding further pressure on the ruble, potentially raising Russia's borrowing costs.

Russia has been forced to spend some $13 billion this month to support the ruble and keep it from free fall.

The one silver lining is that since Russia exports in dollars and spends in rubles, so the ruble's devaluation means there are more rubles for every dollar it gets in oil revenue.

"This year we have made more than 1.5 trillion rubles ($36.5 billion) on the ruble's devaluation," Orlova said.

But that buffer could quickly run out if oil prices remain low or continue falling. That appears likely given the Organization of the Petroleum Exporting Countries' inclination to keep production levels up in the face of a global oil surplus, according to the International Energy Agency.

"If oil price continues to fall at the same rate, the negative effect for the GDP will increase," said Alexander Golovtsov, chief analyst at Moscow's UralSib Asset Management, by telephone. "If oil falls to $75 per barrel, we could lose up to 3% of economic growth. That would somewhat deepen the recession that's about to get underway."

In the past, Russia has largely managed to weather economic woes thanks to a buffer of hefty reserves, including a $91.7 billion Reserve Fund and an $85.3 billion National Welfare Fund.

But while Finance Minister Anton Siluanov has said Russia can make it through 2015 without tapping into the Reserve Fund, that may be an optimistic forecast. Officials and analysts said that if oil keeps falling, Russia could deplete its reserves in one or two years.

"With an oil price of $75-80 per barrel, Russia's reserves would last about two years," said Golovtsov. "If sanctions continue and the price of oil drops to $60, they could be spent in a year."

The added pressure of cheaper oil has exacerbated ongoing budget debates within Russian's government, where increases in military spending have meant that other programs, such as maternity subsidies for women with two children aimed at improving demographics, may have to be scrapped.

The money debate is overshadowed by political questions about the cost of Russia's annexation of Crimea in March and its incursion into Ukraine, where a conflict between a new, pro-Western government in Kiev and pro-Russian rebels in the East has claimed more than 3,500 lives.

Crimea's infrastructure and development alone will cost the Russian budget up to $4.5 billion a year, according to the Ministry of Economic Development. The cost of the incursion itself is impossible to estimate, because Russia has consistently denied sending weapons or soldiers to Ukraine, claiming only volunteers were fighting on the side of the rebels.

Earlier this month, Siluanov said that falling oil prices and geopolitics have already cost the Russian budget 4% of the GDP, according to Itar-Tass.

Speaking at an investment forum on Oct. 2, he was one of several Russian officials who sounded an alarm over the state of the country's economy, even as President Putin downplayed fears.

In statements uncharacteristic for officials in Putin's government, Economics Minister Alexei Ulyukayev called an 8% inflation rate coupled with 0.8% economic growth an "explosive situation," according to Interfax.

German Gref, the chief of Russia's largest bank, Sberbank, went further when he pointed to ignorance of the laws of economic development as the cause of the Soviet Union's collapse. He further lashed out at the economy's dependence on oil and the government's repressive measures, saying at the forum, "You cannot motivate people through the Gulag."

In spite of additional revenues to the Russian budget due to the ruble's devaluation, mounting economic woes are taking their toll on average citizens and small businesses.

Consumer prices have risen by up to 28% for some goods since last year, Golovtsov, of UralSib, says, but salaries and pensions have not kept up. Retail turnover for electronics, cars and other goods has contracted because people have less money to spend due to inflation.

Falling consumer demand, in turn, is hurting small businesses. According to recent data from Cushman & Wakefield cited by Russia's RBC agency, at least 18 properties on Moscow's central Tverskaya Street that used to house shops and restaurants now stand empty.