Russia set for grim 2016 due to plunging oil prices

With oil prices slumping and sanctions gripping tightly, Russia is bracing for a grim 2016 as economic indicators point to an even more pessimistic scenario than a year ago. In the week after Russia’s long New Year’s holiday, the bad news could not have come faster.

First Russia’s ruble swooned against the dollar. Then the grim prognosis for the nation’s economy worsened and policymakers announced plans for sweeping and sudden budget cuts to an already austere spending plan. Now the nation’s finance minister is warning that a key rainy-day piggy bank may be empty by the end of the year — and that if policymakers do not get the economy on track, Russians could see their savings wiped out in a repeat of their 1998 crisis.

The blizzard of bad news is challenging leaders who once blithely said that 2016 would be a year of recovery rather than continued recession. Ahead of September parliamentary elections, policymakers are struggling to find a path that will not push too much pain onto voters, who are watching their diminished paychecks stretch even less at grocery stores where prices are rising rapidly.

“If oil prices fall any further, then the budget’s parameters will have to be adjusted,” Prime Minister Dmitry Medvedev said at an economic forum on Wednesday. “We have to understand this and prepare for the worst-case scenario,” he said.

Russia’s 2016 federal budget, of which half is paid for by oil and gas revenue, was designed with a price of $50 per barrel of oil. The price has dropped to $30. Its ruble has also dipped: The dollar has gained nearly 5 percent against the Russian currency since the beginning of the year, and many analysts expect that it will soon surpass the records set during a brief crash in December 2014. This time, the drop in the Russian ruble’s value is more enduring, with grinding consequences for ordinary Russians.

Russia’s ruble stood at 35 to the dollar in February 2014, before its annexation of Ukraine’s Crimean Peninsula set off geopolitical recriminations. On Thursday, it was at 76.4 rubles per dollar, and some economists warn that it will soon hit 90.

A weaker ruble eases the impact on the budget, because Russia sells its oil in dollars, but it rockets up the price of imported food, a daily purchase for many here given Russia’s poor soil and short growing season. And it makes many commodities, including medicine and travel, more expensive for those paying with rubles.

The protracted economic pain has upset the long-standing bargain that President Vladimir Putin had with his people: prosperity in exchange for political passivity. Putin’s approval ratings remain sky-high, at 85 percent, according to the independent Moscow-based Levada Center , but economic protests directed at other policymakers are slowly starting to grow.

“Many people have become poorer; the middle class has been hurt,” Medvedev said. “And this is perhaps the most painful consequence of the economic shocks last year.”

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Some analysts say grim is the new normal, after a 2015 in which the economy contracted by 3.7 percent. “This is not going to be a year of fast changes, as 2014 and 2015 were,” said Andrei Movchan, the director of the Economic Policy Program at the Carnegie Moscow Center, an independent research organisation. “All of the major changes have really happened, and we will just harvest the consequences.”

Russia’s leaders “are still in shock” about the double whammy of oil prices and sanctions, he said. “They speak about things, but they do nothing.”

At an economic forum in Moscow this week, the memory of Russia’s 1998 ruble collapse and default was heavy in the air. Some top policymakers suggested selling off portions of the government’s stake in major banks and oil companies to raise money and stabilise the struggling banking sector. That would be a major step and a departure from how the Kremlin has responded to the crisis so far.

If the budget is not cut by 10 percent, Finance Minister Anton Siluanov said, “then the same thing will happen as happened in 1998 and 1999, when the population pays for what we did not do” through a loss of savings via inflation.

Siluanov also warned that if budget cuts are not quickly imposed, the country could burn through one of its major reserve funds by the end of the year. The fund stood at $59 billion at the end of November.

But many analysts are skeptical that a major policy redirection is in store. In a long-running competition between security hard-

liners who favor a centralised economy and modernisers who favor a more free-market approach, the hard-liners have been winning since Putin returned to the presidency in 2012.

Russian leaders have said that Western sanctions imposed after the annexation have hurt the economy, but they have been quick to say that they are hurting the West as well.

The situation is “not the worst thing we are going through, but it is harmful for our economy anyway, since it affects our access to international financial markets,” Putin said in an interview with Germany’s Bild newspaper published this week.

Copyright: Washington Post