At the 2015 Gaidar Economic Forum in Moscow, leading economists and government officials, both Russian and foreign, are discussing the economic challenges facing the Kremlin as oil prices continue to fall.
Russian Prime Minister Dmitry Medvedev at the 2015 Gaidar Economic Forum. Photo: RIA Novosti
As oil prices drop below $45, their lowest level since 2009, Russian and foreign participants are discussing the future of the Russian economy at the 2015 Gaidar Economic Forum, an event that is taking place at the Russian Presidential Academy (RANEPA) in Moscow on Jan. 14-16. Given that Russia is highly dependent on oil and gas, the worst-case scenario seems to be coming true. The gloomy forecast that Russia’s investment grade might be downgraded to junk status only exacerbates the problem.
Almost all experts and pundits attending the Forum agree that unpredictability in the Russian economy has become commonplace. For instance, Russian Economic Development Minister Alexey Ulyukaev argues that, during the period of shifting to “a new economic reality,” there is a great deal of unpredictability. He sees “the new epoch” as very bumpy, “uneven” and “conflicting.”
Likewise, Kenneth Rogoff, Professor of Economics at Harvard University, believes that, as long as oil prices remain volatile, the situation will be very hard to predict, especially taking into account Russia’s historical addiction to fossil fuels.
One of Russia’s most respected economists, German Gref, admits that, “We fail to keep pace with the drop in the price of oil,” because it is falling so fast, leaving the world no time to follow it.
Gref warns that $45 per barrel is a “painful price level” for many countries, including Russia and the United Sates, with its shale energy revolution now under threat. The shale oil industry in the U.S. and Canada can be profitable and attract investment at $60 per barrel, according to Gref.
At the same time, Gref sees such a situation as the start of a price war in the energy markets. He even admits that Saudi Arabia, the largest oil exporter, will allow the oil to drop even further, down to $25 per barrel. Yet, he warns at the same time, the price might bounce back very quickly.
“It is impossible to keep the price at such level,” Gref said during the Gaidar Economic Forum, predicting that the oil price in 2015 might rise to $60-70 per barrel. In such case, Russia may face a budget deficit of 3.5 to 4 trillion rubles (about $54 billion in today’s currency terms) and is likely to use its reserves from the National Welfare Fund. If it spends these reserves “reasonably,” these funds will be enough for 1.5 to 2 years, according to Gref.
So, Russia seems to wait for a bottom in oil prices and shouldn’t hope that there will be a bounce back in oil prices. It would be a mistake, Gref says, calling for structural reforms in Russia’s economy, changes in state governance as well as for less regulation from law enforcement and judicial agencies and a more extensive diversification into other sectors.
While admitting that the Ukrainian geopolitical crisis and the sanctions war played a role in hampering Russia’s economy, he sees the sanctions as ineffective and misleading tool of “lulling the governments of what they are doing.” Moreover, he believes they only draw Russian society and the Russian government closer together.
Some foreign entrepreneurs who have been doing business in Russia echoes this view and argue that Russia is likely to be able to shoulder the economic difficulties even in the case of low oil prices.
“Even in its current inefficient form, Russia’s economy is sustainable as long as the citizenry is willing to live with hardship and lost opportunity,” argues Bernard Sucher, a member of the board of directors at Aton Group. “History suggests that one should not underestimate the capacity of Russian people to endure the unendurable.”
Likewise, Russian Prime Minister Dmitry Medvedev, who also took the floor at the Forum, argues that the mobilization of the Russian population “allows us to resolve important economic problems” and gain public support. In addition, a small deficit, extensive foreign exchange and domestic reserves and low unemployment create for the Kremlin some opportunities for economic maneuvers, he believes.
However, other participants of the Forum – including former Finance Minister Alexey Kudrin, Gref and Rogoff are skeptical. In fact, they cautiously warn against over-reliance on Russia’s reserves.
With Kudrin and Gref arguing that Russian can spend its reserves very fast, Rogoff assumes that if the oil price will remain at such a low level – which is highly likely, according to him –the current advantages and measures (such as the floating ruble rate) will be not enough in the long-term. At any time, Russia might be hit by a full-fledged economic crisis, because problems may come from where one doesn’t expect them. As a result, Rogoff is calling for Russia to improve its relations with the world and diversify its economy as soon as possible.
However, some foreign experts attending the forum sound more optimistic. Ron Robin, Senior Vice Provost for Global Faculty Development, New York University, argues that, “Russia belongs to a small group of nations that is too big to fail” and “too important in the world’s system.”
When asked about Russia’s risks of being downgraded to “junk” investment status in 2015, he says it is hardly likely to happen. “Things will kick in if we reach that point, and I think we don’t reach this point right now,” Robin said, describing the media threats of relegating Russia to junk status as a warning shot, a political message to influence Russia’s policy.
Likewise, Prof. Michel Wieviorka, Member of the Scientific Council at the European Research Council, warns against the implications of the economic crisis in Russia for the rest of the world.
“The worse is the economic situation in Russia, the worse it is for all the world. It is very dangerous,” he said, calling for not mixing economics with politics.
Given that Russia has a big corporate debt in 2015 and the sanction that restrict Russia's companies and banks from taking foreign loans, downgrading Russia's investment rankings to "junk" ones can aggravate situation.
Nevertheless, under prevailing conditions, it would be surprising if the ratings of Western agencies have much impact on refinancing conditions, according to Sucher.
“That’s because, by and large, Russian companies will have to seek new funding domestically,” he said pointing out that Russia has already seen defaults.
“Inevitably, there will be more defaults,” he argues. “We already have informal controls on capital and whether formalized or not, there will be more and stronger controls on capital. A very large proportion of the Russian economy is already controlled or meaningfully influenced directly by the Kremlin. In the crisis of 2008-2009, that part of the economy and the major companies which comprise it, were “mobilized”. To some extent, I think one could say that many of those companies have never been entirely ‘de-mobilized’.
Russia Direct is a Media Partner of the Gaidar Economic Forum.
UPDATE: The article was updated on January 15, 2015 to include comments from Bernard Sucher, a member of the board of directors at Aton Group.