Russia’s energy crunch

Russia had a lousy 2015 and 2016 isn’t shaping up to be much better. The economy, dependent on oil and gas exports, shrank by almost 4% last year. Due to the latest slide in oil prices, the central bank has just downgraded growth forecasts and predicts that the economy will spend another year in recession and grow only marginally in 2017.

As oil has plunged, the currency has too, hitting record lows against the dollar. This has driven up inflation to around 10%, eroding the value of people’s pay packets: real wages fell by 9% last year. It also prevented interest-rate cuts by the central bank. As a result, rattled companies have stopped investing and consumers have stopped shopping. Retail sales fell by 15% year-on-year in December, a record slide. In addition, public spending has been squeezed because “the arithmetic of Russia’s public finances is unforgiving”, says The Economist.

The budget deficit climbs by about 1% of GDP for every $5 drop in the oil price. It is set to hit 7% this year. With the $70bn “rainy day fund” dwindling, the government has cut spending, undermining economic momentum. Foreign investors are turning tail. The worst of the energy crunch may be over, as President Vladimir Putin insists. “But for ordinary Russians, phase two will not seem much better.”