Russia’s energy crunch

The oil and gas-dependent Russian economy shrank by almost 4% last year – and this year isn't shaping up any better.

Andrew Van Sickle
By Andrew Van Sickle
published

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."

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Andrew Van Sickle
Andrew Van Sickle

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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