Debates: Oil prices could be entering a bear market, with some experts now predicting prices falling to as low as $40 per barrel. What are the implications for Russia’s economy?

There is no certainty that oil prices will stay for very long around $40 a barrel. Photo: RIA Novosti

With oil prices entering a bear market and both West Texas Intermediate (WTI) and Brent Crude dropping to about $40 per barrel, both Russian and foreign experts are concerned about the potential impact on Russia’s economy, especially if these low prices persist for a long period of time. How will Russia adjust to a new era of low oil prices?

Amidst this background of falling oil prices, experts from the Valdai Discussion Club are trying to find out the potential impact on the Russian economy. Will a price of $40 per barrel finally stimulate Russia to pursue economic reforms? How can Russia diversify its budget revenues? And should Russia weaken the ruble to keep industrial production afloat?

Danila Bochkarev, EastWest Institute fellow on economic security issues (Brussels, Belgium)

In the international context, oil at $40 would not allow for investment into increased capacity. Today there is a sharp reduction of investments into extraction. However, there has to be an adjustment for how strong the dollar is, compared to other currencies. The U.S. is no longer the largest oil importer, and the real price of oil in euros is not as low as it is in dollars.

However, there are solid reasons to consider $40 per barrel to be the optimal price for Russia to pursue economic reforms. It would allow Russia to maintain a certain level of production, as well as invest into extraction and refining projects.

At the same time, under the existing tax system for the oil industry, revenues from oil would be very minor, which would force the government to search for other sources of revenue. This was the case in the early 2000s, when the flat tax rate and other measures were made to increase the tax base.

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What might become new sources of Russia's budget revenues in this case? First, there could be an increase of the industrial tax base and in the income tax. The budget revenues might also come from agriculture.

Should Russia weaken the ruble to encourage industrial production or to keep it strong? Well, there is rather a paradoxical situation currently, when a strong ruble co-exists with low oil prices. That’s why the budget deficit might reach above the benchmark of 3 percent of GDP. So, today one of the recipes could be to print more money and let it go to work in the economy. It could bolster a weakening economy.

Jacques Sapir, French economist, director of the Paris-based School for Advanced Studies in the Social Sciences (EHESS)

There is no certainty that oil prices will stay for very long around $40 a barrel. Most forecasts are putting prices at between $55 and $60 for 2017. Anyway, the stimulus for economic reform and economic restructuring will be great in Russia, but I believe this will be induced much more by the geopolitical context than by oil prices.

The global conflict with the U.S. will still dominate the geopolitical situation and Russia, for its very survival, will have no other option than to evolve toward an economy much more based on internal investment and consumption. For the next twenty years we will see a trend toward a “de-globalization” of major economies. This trend will both present a challenge but also offer major opportunities for Russia. It will push Russia toward more high value-added and innovation-based production methodologies.

The main issues for fiscal policies will be a diversification of budget revenues, with a more progressive income tax, a greater contribution from the non-hydrocarbon sector, but also a rationalization of tax incomes on all natural resources. What is obvious is the fact the tax share in national income could and needs to be increased.

One of the issues in Russia today from the point of view of helping the economy in the long-term is the sustainability of fiscal policy, particularly from the revenue side. It means that the Russian economy needs to be more diversified. Russia is a leading exporter of raw materials and it is not necessarily a bad thing. The question is how it is managed.

Certainly, Russia will have to maintain a low ruble for the next five to ten years to come. A weak ruble not only benefits industrial exports but it also reorients consumption toward national products. This is important both for agriculture and the agro-industrial sector. The main issue, then, will be to develop an efficient enough financial system allowing some profits coming from this weak ruble to be reinvested in other sectors where immediate profits are not necessarily high in the short term, but would become greater with time.

Radhika Desai, professor at the Department of Political Studies and director at Geopolitical Economic Research Group, University of Manitoba (Canada)

There is no doubt, when the price of oil declines, there is greater pressure on the Russian economy and on the Russian state budget. The problem is the sort of reasoning that assumes Russia has no choice but to be subject to this fluctuation of oil prices.

However, there are alternatives, because there are two major factors that are constantly subjecting Russia to great volatility – the fall in the price of oil and the extent of sanctions, which reduce financial flows coming into Russia.

I don't think that reforms should be neoliberal. Until very recently, many countries could get away with imagining that, if they simply liberalized trade, they would grow, develop and so on. It may never be true but it seemed truer in the recent past; however, today even Western countries themselves think that monetary policy is exhausted.

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The time has come for the government to take more responsibility for stimulating the economy. The Japanese government has recently announced a major fiscal stimulus. Theresa May, the new prime minister of Great Britain, has announced that she wishes to undertake a new industrial policy.

So, for neoliberals in Russia, who think that the West is prosperous and there is a reason to copy its practice, they might be wrong: I would like to say that today is a completely different time.

One of the issues in Russia today is the sustainability of fiscal policy, particularly from the revenue side. The Russian economy needs to be more diversified. Russia is a leading exporter of raw materials and it is not necessarily a bad thing, but the reforms described earlier are necessary.

Money has been created all the time. The issue in not whether we should print money, the issue is what it is printed for. The question is what are you going to invest in, and if these investments are increasing the production and productivity of the Russian economy.

Of course, the Russian economy is highly externalized but China's economy was also highly externalized. Immediately after the financial crisis hit the country, the Chinese leadership decided on two very different phases of policy. One was to engage massive investment programs within the economy – it was for the first two years after the post-crisis period. Then, they made growth more internally directed by focusing on increasing wages and the income levels of people in general. I think this sort of policy will also give Russia internal stability, which helps better to withstand external shocks, whether it comes from capital flows or from oil prices.

The comments of Danila Bochkarev, Jacques Sapir, Radhika Desai were kindly provided by the Valdai Discussion Club. They were edited and adjusted to Russia Direct's style.