2016: THE YEAR OF RUSSIAN SELF-DESTRUCTION?


By Julia Aurell
Staff Writer

While consumers have been enthusiastic about the decline in oil, and thus petrol prices, not everyone shares this vision. In December 2015, Vladimir Putin announced that the Russian economy had contracted by 3.9 percent in 2015, and inflation had risen to be just shy of 13 percent. He attributed the contraction to the fall in the price of oil and natural gas, Russia’s two largest exports. Nevertheless, he assured the public that the worst of the economic downfall had been surmounted, and released a new budget, which estimated that the price of a barrel of oil would remain at 50 USD during 2016. As the first month of 2016 comes to a close, one can observe that the price of oil has sunk to a mere 30 USD a barrel. Thus, the latest concern of the Kremlin is if the worst of the economic hardship has been endured, and how Russia will respond in the face of such economic backlash.

From 2010 until mid-2014, world oil prices remained fairly stable, averaging around 110 USD a barrel. However since June 2014, prices have plunged by nearly 70 percent. The collapse has been associated with the surge of US production as it attempts to reduce its dependence on foreign oil, as well as Iran’s renewed entrance to the market. However, the surge in supply did not need to equate to a decline in prices. Rather, the prices have declined due to the surprising decision by the oil cartel OPEC (Organization of the Petroleum Exporting Countries), and specifically Saudi Arabia, to not cut supply as a way to increase prices. Saudi Arabia, the world’s largest oil exporter and OPEC’s most influential member who could most easily fluctuate the price of oil by restricting its production, has chosen to keep pumping. The decision has stemmed from a political motivation, rather than an economic one. If Saudi Arabia were to cut its production, it would allow Iran, Saudi Arabia’s rival, to increase its market share. The continued ramping up of current tensions between the two rivals is likely to continue as they seek to outmaneuver one another for hegemony over the Middle East. Consequently, the supply of oil has outmatched the demand in the world market, pushing prices down.

The increase in supply of oil offers the economic giants, such as China, the opportunity to fuel economic growth, as they now pay a lower price for the same commodity. The euro area’s oil-import bill has fallen by 2 percent of GDP since mid-2014 , and the share of oil in China’s total imports is forecasted to decline by 7 percent. Additionally, cheap oil drags down the price of natural gas which in turn replaces coal, a dirtier fuel. However, not everyone has been equally pleased about the downturn in oil prices, most noticeably the Russian Federation, whose greatest exports are oil and natural gas.
When Vladimir Putin came to power in 2000, the world was experiencing an economic boom. With an economy growing at 7 percent, stock prices heightened and incomes tripled by 2007, Putin’s support base expanded and allowed Russia to regain a voice in the international arena. However, current oil crisis, intertwined with the aftermath of the global economic crisis of 2008, has presented Putin with a deeply contrasting scenario. Russia is no longer a rising country, but rather one in relative, if not absolute, decline. Since the annexation of Crimea, and Russia’s proxy-war in Ukraine, Russia has endured continued sanctions from the European Union and the United States. Subsequently, the sanctions which targeted Russia’s energy sector have worsened the economic depression, as most of Russia’s exports until recently went to the European Union and Ukraine.

Looking ahead, some analysts predict that the Russian people will wait out the current recession, as they did during the Soviet era. However, such conclusions should not be drawn so quickly. During the economic boom in the early 21st century, Russian citizen’s experienced and adapted to a new lifestyle of increased incomes, life expectancy, and benefits. As these lifestyle changes began to decline, 400,000 people choose to emigrate from Russia in 2015 alone, compared to 35,000 in 2008. The display of the internal dissatisfaction can also be seen through the continuous protests around the country. Krasnodar, a city of nearly 1 million people located by the Black Sea, has seen continued illegal protests over the last months over suspended senior benefits in regards to public transportation. However, the senior citizens are not alone; members of Putin’s blue-collar support base have begun directing their anger at the state with the fear of increased prices and fees, as Russian truck drivers rallied in opposition to the proposed highway fee. While the government allows for protests regarding matters such as lost wages, the distinct authoritarian nature of the country emerges in the face of political critique, and such critique may be coming sooner than expected.
The New York Times Bureau Chief in Moscow, Neil MacFarquhar, notes “Russia spent around 50 billion to host the 2014 Winter Olympics, and a similar construction juggernaut is building stadiums nationwide for the 2018 World Cup.” In the face of the continued budget cuts, such expenditures may not sit well with the Russian public, and the continued military expenditures seem to be making matters worse. Similarly, citizen Sergei Titvo describes the Putin regime as a disappointment as he explains “What we [the Russian people] need is an effective manager, but what we got is the Olympics, soccer and war.”

To address said economic challenges, Putin may attempt a deepening relationship with People’s Republic of China, as PRC will want to take advantage of the decreased price of oil to reenergize her declining economy. Similarly, removing the countersanctions inflicted upon the European Union could improve the standard of living in the nation. However, the fact remains that last time that Russia was hit by an oil crisis of this magnitude, the Soviet Union collapsed. Vladimir Putin will need to work consistently and in uniform with both the citizens of the Russian Federation, as well as the international communities, to ensure that the economic downfall does not translate into a political downward spiral.

Image by NWFblogs

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