Russian Economy Under Low Oil Prices

In recent years, Russia’s economic growth has been unsatisfactory: In 2015, there was a negative growth of 3.7% in GDP, and a negative growth of 0.3% in 2016. It started to rebound in 2017, but only increased by 1.5%. The economic growth rate in 2018 It was 2.3%, an increase of 1.3% in 2019. Entering 2020, when the economic situation has not improved significantly, the Russian economy is facing the double attack of the new crown pneumonia and the plunge in oil prices. Would you like to visit Russia, don’t forget to get your Russian visa first. 

Severe epidemic

At the end of February, when China was fighting the epidemic, Russia only found two people infected with the new crown pneumonia; until the end of March, the epidemic in Russia was not serious, and few people on the streets wore masks. At that time, the Russian people were unprepared for the rapid development of the epidemic. On March 17, Russian President Putin also announced that Russia has successfully suppressed the large-scale spread of the new crown pneumonia epidemic in Russia.

But I did not expect that from the end of March, the number of confirmed cases in Russia began to rise sharply. By April 21, the cumulative number of confirmed cases had exceeded 52,000. Later, the epidemic turned and spread sharply. It was 11 consecutive days before May 16. There were more than 10,000 new cases in Russia every day. By mid-May, the number of infected people in Russia suddenly became second only to the United States from outside the global ranking of 50. The cumulative number of confirmed cases on May 31 has exceeded 400,000. Later, because the Brazilian epidemic was not under control, the number of infected people increased significantly, surpassing Russia, and Russia’s number of infected people fell to the third place after the United States and Brazil in the global ranking.

In response to the development of the epidemic, the Russian government proposed some prevention and control measures. In March, people were also required to stay at home, but people did not implement them well. Due to the rapid development of the epidemic, on April 2, Putin issued a warning in a televised speech to the people across the country: “If anyone goes out in violation of the blockade order, he can be sentenced to up to two years in prison. If he infects others or even kills, then at least It must be sentenced to five years.” At the same time, Putin also proposed to extend the paid vacation in Russia from April 5 to April 30, authorizing all regions to implement a state of emergency, and implement “quasi-blocking cities” in many places, including Moscow. policy. It also stipulates that people can only go out in a limited number of situations such as going to work, walking pets, buying food and going to the hospital. Restaurants, bars, cinemas, shopping malls and other public places remain closed. Supermarkets, pharmacies, banks and other places posted signs, requiring people in line to be separated by 1.5 meters. Many places began to use police patrols, street cameras, mobile phone positioning, and tracking bank card payment records to strengthen supervision. In addition, Russia has begun mass production of testing reagents to improve testing efficiency. On the external front, measures have been formulated to limit the number of chartered flights returning to the country, continue tracking returnees, and legislative penalties for violations of the blockade order.

Putin said on May 22 that the new crown epidemic in Russia has stabilized. In Moscow and some other regions, the number of new confirmed cases every day is gradually decreasing. But overall, the epidemic in Russia is quite serious. As of June 8, 2020, the total number of confirmed cases in Russia has exceeded 470,000.

Plummeting oil prices

Since 2020, oil prices in the international market have begun to decline gradually. But in the first two months, although oil prices have declined, the magnitude is not significant. By the beginning of March, due to the failure of OPEC and non-OPEC oil-producing countries to reach a production reduction agreement, the rate of decline in oil prices accelerated. March 9 was called the “Black Monday” of international oil prices, with the largest single-day drop of 33.65%. It refreshed the biggest one-day decline since the Gulf War in 1991.

With the spread of the epidemic around the world, many countries have lost control of the epidemic, and international oil prices have continued to fall precipitously. At the end of March, the price of Brent oil fell to US$23/barrel, the lowest WTI offer fell to US$19.92/barrel, and the spot of Russian Ural crude oil fell from US$50/barrel in February to US$15/barrel. The International Energy Agency (IEA) reported that oil prices fell by 55% in March. After declining oil prices have been the lowest level since 2002.

Of course, the decline in Russian oil and gas prices did not start in 2020. The downward trend has already appeared. In 2019, the average annual price of Ural crude oil dropped by 8.7% compared with 2018, and the price of natural gas dropped by 15%. Since March, oil prices have plummeted. A sudden and direct cause is the spread of the global epidemic. Many countries have adopted measures such as “closing cities”, substantially reducing economic activities, suspending production and quarantining residents at home. The rapid spread of the epidemic has caused widespread fear in the market, and it is difficult to judge the bottom of the decline in international oil demand and market prices. Under the above circumstances, the demand for energy products such as oil and gas has been greatly reduced. Taking China as an example, in the first quarter of 2020, domestic demand for refined oil fell by 35.7% year-on-year, of which demand for gasoline, diesel, and kerosene fell by 30.6%, 37.6%, and 47%, respectively. (Quoted from Wang Yue et al.: “The Impact of the New Round of Low Oil Prices on the Petroleum Industry and Suggestions for Countermeasures” “International Petroleum Economy”, Issue 3, 2020)

It must be pointed out here that the spread of the global epidemic is undoubtedly a sudden and direct cause of the sudden drop in oil prices in the short term in 2020. However, from a long-term analysis, the imbalance between supply and demand in the international oil market, that is, oversupply, is the fundamental factor for the low-level operation and continuous decline of oil prices.

The changes in the relationship between oil supply and demand in the international market since 2020 can also illustrate this problem. On March 7 this year, OPEC and Russia failed to reach an agreement on its production cuts. Saudi Arabia, a major oil producer, unilaterally announced that it will increase its daily output of crude oil from the current 9.7 million barrels to 10 million barrels from April, and claimed that it may even increase to 12 million barrels if necessary. The purpose of this is to seize market share by increasing production and lowering prices. On the same day, Saudi Arabia reduced the price of oil buyers from Asian countries by $6 per barrel. At the same time, the sharp increase in shale oil production in the United States has further increased the pressure of oversupply of oil, making it difficult to contain the downward trend in oil prices. On March 16, the price of Brent crude oil futures fell to US$30.05/barrel, and the price of WTI crude oil futures fell to US$28.70/barrel. In just 10 days, they plunged by 34% and 30.55% respectively.

Later, OPEC and non-OPEC oil-producing countries reached a new production reduction agreement that took effect on May 1. International oil prices rebounded slightly in May, but the agreement has been unable to reverse the imbalance between supply and demand in the international crude oil and petroleum product markets. The global spread of the epidemic, coupled with the substantial increase in crude oil production in the United States, has caused a more serious imbalance between supply and demand in the crude oil market that has been oversupply for many years, and the pressure of oversupply in the international oil market has continued to increase. The “Global Energy Assessment” issued by the International Energy Agency (IEA) stated that global energy demand will fall by 6% in 2020, and believes that this “new coronavirus pandemic has caused the global energy system to suffer the greatest impact in more than 70 years.”

Impact on the Russian economy

With the continuous development of the epidemic, the Russian economy has suffered more and more shocks.

According to data released by the Russian Federal Statistical Office on May 26, 2020, some major economic indicators of Russia in the first quarter are still on the rise. For example, the GDP in the first quarter increased by 1.6% compared with the same period last year. Industrial output value Growth of 1.5%, processing industry growth of 3.8%, machine equipment manufacturing growth (January to April) growth of 0.9%.

However, due to the rapid development of the epidemic, Putin announced the implementation of non-working day measures throughout April, and most companies in Russia have suspended work or switched to remote offices. As a result, by April, the Russian economy began to experience a substantial decline. According to the data provided by the Ministry of Finance on May 20, nominal GDP fell by 28.3% in April, which was a decrease of about 33% from the previous month. Russian Economic Development Minister Leshtnikov stated that compared with before the new crown pneumonia pandemic, the level of economic activity in Russia at the end of April dropped by 33%, and a quarter of Russian companies will need support due to the impact of the epidemic. Due to the limited operation of enterprises and companies in various regions of the country, 28% of jobs have been lost. The unemployment rate reached 5.8% in April and was 4.6% in 2019.

The plunge in international oil prices has also had a serious impact on Russia’s fiscal and financial sectors.

Ural crude oil prices are currently hovering between 20 and 30 US dollars per barrel (the average annual price of Ural crude oil in 2019 is 63.83 US dollars per barrel), and Russia’s forecast for determining the budget balance point for 2020-2022 is that crude oil prices are 42.4 US dollars. /barrel. The sharp drop in oil prices reduced Russia’s tax revenue by 31% in April. In addition, the sharp drop in oil prices has caused the Russian currency, the ruble, to fall sharply against the US dollar since early March. It has fallen below the 80 ruble to 1 US dollar mark several times, and is currently fluctuating around 70 to 1. From the perspective of foreign trade, there has been a downward trend since 2020. The total import and export volume in the first quarter fell by 14.5% compared with the same period last year.

In general, the severe epidemic and the plunge in oil prices have had a huge impact on the Russian economy. According to estimates by the Russian National Rating Agency, during the epidemic, Russia’s total losses may reach 239 billion US dollars.

The epidemic and the plummet of oil prices, these two issues affecting the Russian economy are interrelated. From a short-term perspective, the epidemic has a greater impact on the Russian economy; from a longer-term perspective, the continuous decline in oil prices has a more profound and longer-term impact on the Russian economy.

Economic measures

Faced with the severe impact of the epidemic on the economy, Russia’s response policy is similar to most countries in terms of general policy, that is, while adopting strict prevention and control of the epidemic, it actively strives to promote economic recovery and development. The main policy is to implement a loose fiscal policy to provide financial support for economic recovery and development; the other is to implement a policy of stabilizing the domestic financial market and the ruble exchange rate to stop capital flight and restrict the cross-border flow of speculative capital.

Around the above main policies, Russia has adopted a series of specific measures. Russian Prime Minister Mishustin said that the Russian Ministry of Finance has reserved a total of 1.4 trillion rubles to support and rescue Russian companies affected by the epidemic. According to local media reports, the total amount of funds that Russia currently determines to support the economic response to the crisis has exceeded 5% of Russia’s GDP in 2019. The Russian government will take measures to first support the industries hardest hit by the epidemic, including automobile and aviation manufacturing, non-food trade, exhibition services, culture, leisure and entertainment, sports and fitness, tourist hotels, catering, coaching and training, beauty, maintenance and other life services Industry etc.

It is reported that the Russian government intends to withdraw about 600 billion rubles (about 8.3 billion US dollars) from the State Welfare Fund to complete the budget allocation. The Russian Federation Council also increased Russian government fiscal expenditures by 162.7 billion rubles (approximately US$2.3 billion), 556.9 billion rubles (approximately US$7.7 billion) and 677.6 billion rubles (approximately US$9.4 billion) in the next three years.

In addition, Russia has also determined to focus on small and medium-sized enterprises. On March 31, Russian Finance Minister Siluanov said at the Russian Economic Conference: “The government focuses on supporting the development of small and medium-sized enterprises in order to stabilize the local economy. The measures the government will take include reducing the social insurance premiums that small and medium-sized enterprises should pay. The rate has been reduced from 30% to 15%. The collection of taxes payable by SMEs will be suspended for six months, and preferential loans will be provided to SMEs.”

Taking into account that Russia currently has relatively sufficient foreign exchange reserves (reaching US$581 billion in early March 2020), Russia can also use certain foreign exchange reserves to make up for the lack of national fiscal expenditures when necessary. In order to stabilize the ruble exchange rate, the Central Bank of Russia has taken measures such as selling foreign exchange in the domestic market, injecting 500 billion rubles into the Russian banking system, and stopping the purchase of foreign exchange on the domestic market from March 10. The Governor of the Bank of Russia Nabiullina recently stated that if the price of Ural crude oil does not recover to more than US$42.4 per barrel, the Bank of Russia will stop purchasing foreign exchange.

Russia is also stimulating the economy by cutting interest rates. On April 24, the Central Bank of Russia cut interest rates significantly by 50 basis points, lowering the benchmark interest rate from 6% to 5.5%, which is the lowest level since 2012 in Russia. Bank of Russia Governor Nabi Urina said that in order to further support the economy, the possibility of further interest rate cuts is not ruled out. Many analysts said that the Bank of Russia will continue to cut interest rates, and the fastest time to cut interest rates may be in June.

In order to implement economic policy measures to deal with the epidemic, on May 25, Russian Minister of Economic Development Reshetnikov stated that the Ministry of Economic Development has drawn up an economic rehabilitation program aimed at normalizing business activities, restoring employment, and guaranteeing residents’ income. A plan implemented in three phases.

The first stage is the “adaptation stage”. In this phase, starting from the end of the second quarter of 2020 to the third quarter, the interim goal is to prevent the economic recession from spreading to a wider range of industries and stabilize the economic situation in the regions most affected by the epidemic. The initial result should be to prevent the economy from continuing to decline from its lowest point in the second quarter of 2020. At the end of this period, there should be no negative growth in monthly GDP indicators, residents’ real income, manufacturing PMI, retail and service sales.

The second stage is the “recovery stage”. In this phase, from the fourth quarter of 2020 to the second quarter of 2021, the interim goal is to ensure economic recovery and growth of citizens’ income. At the end of this period, the unemployment rate has fallen, and the monthly average GDP indicators and the actual income of residents have returned to at least 98% in 2019; if all epidemic prevention measures are lifted, they should return to 100% in 2019.

The third stage is: the “active growth stage” from the third quarter to the fourth quarter of 2021, the interim goal is to ensure the positive economic growth and strive to achieve economic growth faster than the world average. The initial result should be to achieve sustainable economic growth, and the growth rate should be in line with national expectations.

Russian President Vladimir Putin approved a national economic recovery plan on June 2, which will be implemented from early July.

Economic development prospects

Given the fact that there are still many uncertain factors in the epidemic and oil prices, there are big differences in the forecast of Russia’s economic development prospects. On May 18, the Central Bank of Russia predicted that Russia’s GDP growth rate will decline by 4% to 6% in 2020. This forecast is consistent with the forecast of international institutions such as the International Monetary Fund (IMF). Mikhailian, a member of the board of directors of FinExper-tiza, a Russian international audit and consulting company, believes that the official forecast of the annual GDP decline is somewhat optimistic. He believes that the actual economic contraction in 2020 may reach 7%-8%. According to a survey of 19 Russian economists conducted by the Development Center of the Russian Higher School of Economics in April, the Russian economy is expected to shrink by about 2% in 2020. According to the latest survey conducted by 28 economists from the Development Center of the Russian Higher School of Economics (HSE) in May, in the second quarter, when the Russian economy was hit by the epidemic and low oil prices, GDP fell by at least 10% overall. Previously, the HSE report showed that if the new crown pneumonia epidemic cannot be quickly contained on a global scale (including Russia) according to the most pessimistic forecast, the Russian economic recession will only be stopped in 2022. The above report believes that Russia’s GDP will decline by 7.1% from 2020 to 2021, and the unemployment rate will reach 9.5% and 9.8% respectively. In 2020, the actual disposable income of Russian residents will fall by 12.1%.