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“The modern economic crisis in Russia”
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“The modern economic crisis in Russia”

The state of the Russian economy depends on the role of its exports – especially oil, writes Enitan Damilola Temidayo, 23, a Correspondent from Nigeria now studying in Moscow, as he looks at the impact of low world oil prices and economic sanctions.

Economic growth between 1999 and 2008 was strongly influenced by the continuous uptrend of oil prices. Russia ranks eighth in the list of countries with oil resources, and is the second largest oil exporter in the world after Saudi Arabia.

It also has the world’s largest natural gas reserves and is the largest exporter of natural gas in the world. In addition, Russia is in second place in the world in terms of coal reserves.

These natural resources, particularly oil, were the main driving force of the Russian economy for a long time and a significant factor in the economic well-being of Russia. The role of oil requires special attention when discussing the economic conditions of Russia.

The income derived from oil production significantly contributed to the overall increase in GDP due to the multiplier effect. Russia is becoming more dependent on world oil prices. Russia’s dependence on exports of oil and other energy sources made her economy vulnerable to the volatility of world commodity prices, as exports of machinery and equipment accounted for only five per cent of the total Russian exports.

Recently in Russia, the influence of declining oil prices has been felt more than in any other oil-producing country. This statement can be explained by the fact that oil exports from Russia account for about 70 per cent of the total exports of the country. Revenues from oil sales account for 52 per cent of the federal budget, so the decline in oil prices in late 2014 was accompanied by a proportional decrease in revenue from oil exports compared to previous years.

The sharp drop in oil prices in the second half of 2014, more than 50 per cent, is the deepest since the recession of 2008-2009. It was especially painful for the Russian economy. The reasons for the decline include slowdown in the global economy, mainly due to the weakening of the growth dynamics of China;, higher oil supply in connection with the growth of production, particularly in Libya, the US and Iraq; and OPEC’s decision to keep production volumes despite falling prices. The dynamics of prices of oil directly affect the fiscal stability of Russia because income from the sale of oil, gas and petroleum products makes up half of the overall Russian budget.

After the annexation of Crimea to Russia and its military actions in the East of Ukraine, the League of Western countries, including the US and the countries of the European Union (EU) imposed sanctions against Russia, some of its top state officials and private individuals. The main affected sectors are energy, banking and defense. Sanctions restrict Russia from conducting trading partnerships with any of the countries participating in the sanction policy. For example, there is currently a ban on the export to the EU and the United States of certain products of the oil industry, although the export products of the gas industry remain unchanged. Arms deals between Russia and the EU have been somewhat limited. The access of Russian banks to international credits currently is also limited.

As a result, there was outflow of capital from Russia as well as significant losses on the Moscow stock exchange, as evidenced on “Black Monday” of March 3, 2014. Investments and the creditworthiness of Russia have also been further undermined by Western economic sanctions imposed at the end of July in response to Moscow’s destabilization of Eastern Ukraine.

Financial sanctions were the most significant in the short term. Many key Russian banks and companies have faced constrained access to Western sources of financing in a situation where they are largely dependent on foreign capital. The effects of sanctions became painful for Russia in December 2014, considering the fact that the country had to repay or refinance a large tranche of debt (about 35 billion U.S. dollars), in a situation in which she was cut off from Western capital and the ruble lost most of its value.

The economic situation in Russia has deteriorated further as a result of retaliatory measures applied in August 2015. It was expressed in the form of an embargo on imports of many agricultural and food products from countries that have imposed initial sanctions against Russia.

Four years down the lane, yet no light in sight at the end of the tunnel. How much longer can the Russian economy withstand all these challenges? Or should we expect a turnaround anytime soon?

photo credit: Kurayba Dramatic Stairs via photopin (license)

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About me: I am a vibrant student of International Economics aspiring to work with professionals in the World Bank Group or International Monetary Fund to help sustain the steady development of global economics. Over the years, I have taken interest in reading and researching but only recently discovered my writing potential. I have enjoyed the recent publication of several academic papers.

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Opinions expressed in this article are those of the author and do not necessarily represent the views of the Commonwealth Youth Programme. Articles are published in a spirit of dialogue, respect and understanding. If you disagree, why not submit a response?
To learn more about becoming a Commonwealth Correspondent please visit: http://www.yourcommonwealth.org/submit-articles/

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