The Russian delegation at the World Economic Forum in Davos admitted that the country needs structural economic reforms. However, experts warn that these will not happen as long as there is no change in policy mindset within Russia.

Russian Deputy Prime Minister Yuri Trutnev adjusts his headphone during a panel "The Outlook for Russia" at the World Economic Forum in Davos, Switzerland, Friday, January 22, 2016. Photo: AP

With the World Economic Forum starting this week in Davos, Switzerland, Russia sent a delegation in an attempt to convey its concerns over the current economic crisis as well as advance proposals for emerging from it.

During the Forum one of the members of Russia’s delegation, former Finance Minister Alexey Kudrin warned that “the peak of the crisis is ahead” and suggested that the Kremlin should be ready for this. According to him, the aggravation of the economic situation will translate into a drop in investment and the incomes of Russia’s population. Moreover, the sharp devaluation of the ruble will hamper Russia’s attempts to innovate and modernize its economy.

However, what concerns Kudrin most is the impact of the ongoing drop of oil prices on Russia’s economy. He is very pessimistic. He doesn’t rule out that oil prices will drop further, even below $18 per barrel. On the other hand, Kudrin believes such market fluctuations may encourage the Kremlin to decrease its dependence on hydrocarbons. Likewise, Deputy Prime Minister Yuri Trutnev, who headed the Russian delegation to Davos, argues that low oil prices will force Russia’s authorities to conduct serious structural economic reforms.

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Meanwhile, Vladimir Mau, the rector of the Russian Presidential Academy of National Economy and Public Administration (RANEPA), echoes Kudrin’s gloomy forecast about the future of the global oil market and, thus, Russia’s economy. He argues that the country’s economy should eliminate its dependence on the oil rent, because of the decreasing demand for oil that might happen in the future.

“The demand for oil as a commodity depends on technological progress,” Mau wrote in his column for Vedomosti, the business newspaper. “And it’s not obvious that oil as a fuel will be always in demand in times of economic growth. With the change of the technological model, it is not ruled out that oil will become just a stock commodity for the energy and chemical industry,” he said, adding that oil will not be a political tool anymore, as it was during the last 40 years.    

Mau argues that today, “Oil prices are oscillating with a great deal of amplitude, which depends on the interconnection of numerous parameters that are very difficult to predict. And the less the economy depends on the current vicissitudes [of the oil market], the better it can sustain long-term economic growth.”   

Likewise, Yakov Mirkin, an expert from the Institute of World Economy and International Relations (IMEMO) at the Russian Academy of Sciences, calls for economic reforms that will cure or, at least, alleviate the oil curse, because in the future the share of Russia’s oil in the European energy market will be inevitably decreasing.

This means that the forecasts that the Russian economy has reached its lowest point are premature. He believes that the dollar will remain “very strong cyclically” and the price of oil will be low during, at least, the next three to four years. Given that the Western “technological sanctions” could start biting and geopolitical risks are increasing, it is out of the question even to talk about overcoming the crisis in the near future.

“The government and the fiscal authorities stubbornly believe that everything they do is right and there are no mistakes,” Mirkin said. “As long as we have this economic team at the helm, there won’t be any substantial changes.”

Could Russia’s economy benefit from tensions in the Middle East?

However, the geopolitical turbulence in the Middle East and, particularly, the recent growth in tensions between Iran and Saudi Arabia, which resulted from the execution of the Shia priest in Saudi Arabia, could spur an increase in oil prices and change the situation in favor of Russia.

Christopher Hartwell, the president of the Center for Social and Economic Research in Warsaw (CASE) says that the instability in the Middle East between Iran and Saudi Arabia can boost the price of oil.

“Saudi Arabia has used oil in the past as a weapon, and I don’t see that changing any time soon,” he told Russia Direct. “But instability could also drive oil prices higher.”

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Theoretically, any conflict at the Middle East can lead to the growth of oil prices and this might happen abruptly and unexpectedly, said Stanislav Tkachenko, professor in the International Relations Department of St. Petersburg State University.

“If the open conflict between two oil giants — Saudi Arabia and Iran — starts, the price of $100 might become a reality in several months,” Tkachenko argues. “However, such kind of conflict is hardly likely to happen in the near future. Pragmatists from both sides in the leadership of these powers will do their best to prevent it.”

At the same time, economists warn such changes could be short-term and only aggravate the problem by misleading the Russian authorities that they can wait with reforms.

“There is a chance [the tensions between Iran and Saudi Arabia] might increase oil prices, but the fact that this influence has been very limited indicates that the oil market is caught up with more powerful fundamental factors,” said Oleg Buklemishev, associate professor of Economics at Lomonosov Moscow State University (MGU), in an email to Russia Direct.

Evsey Gurvich, head of the Moscow-based Economic Expert Group in Moscow, says that previous experience indicates that in the case of open confrontation between Tehran and Riyadh the growth in oil prices will be short-term. Therefore, there is no reason to expect “the return of expensive oil.”

Robin Lewis, director of RANEPA’s Master of Global Public Policy program, agrees that oil prices will never return to the previous level, but expresses hopes that “things might move in a more positive direction toward the end of the year” and “oil prices will return at least to a more reasonable level.”

“Right now it is a very unusual and very extreme situation, where oil is so undervalued. Hopefully, the kind of balance will be restored,” he told Russia Direct during the Gaidar Economic Forum.  

It remains to be seen if there will a bounce back in oil prices in 2016, but it won’t save the Russian economy. In such an unpredictable situation, the only way to improve the economic situation in Russia seems to conduct structural reforms. In times of external pressure, the Kremlin had better “conduct the policy of stimulating domestic supply and demand, unchaining the energy of business, decreasing tax and regulatory burden, costs and risks,” recommend Mirkin.

However, he is disappointed with the current policy of the Russian authorities, pointing out that, instead, the Kremlin is conducting a policy of restrictions and excessive control that hampers business and the economy.