Russia’s economy: Still dependent on oil

After two years of recession caused by lower oil prices and western sanctions, Russia’s recovery benefits Vladimir Putin as he seeks a new term in office. However, this improvement won’t last long without structural reforms. EURACTIV.fr reports.

Russia’s economic recovery is timely for Vladimir Putin, following a 15% peak in 2015, inflation fell last year to 3%. As for growth, it is slowly recovering after a -3.7% dive in 2015, with a 1.5% growth in 2017 that should be followed by another 1.8% expansion in 2018.

Rating agencies raised the country’s credit rating at the end of February and forecast a stable future. S&P’s rating for the country, therefore, upgraded it from the so-called “junk”  or speculative category. Behind this return to stability, there is a strong link between the rouble and oil: as the rise of the price of black gold is the main reason for this upgrade.

“The situation plays in the country’s favour, looser fiscal policies allowed it to implement child benefits, aid for low-income households and other benefits facilitated by the rise in oil prices,” said Dominique Fruchter, an economist at the French Insurance Agency for External Trade (Coface).

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Dependency on oil

If the rise in oil prices gives Vladimir Putin a certain leeway, Russians are now expecting more from him on the economic front.

Even if he is as popular as ever, the president cannot rely on the success of Crimea’s annexation or on the strong economic performance of his first two mandates (2000-2008), where growth reached around 7%.

“He still believes he has a certain margin, but not forever. Russians are tired of his international activism, he will now have to act on the economic front,” said Fruchter. “Prices should not drop again. If they stay at the current level, he will have the means to reform, especially the manufacturing sector.”

The next few years will depend on the country’s ability to free itself from its dependency on hydrocarbon revenues, as they currently generate 30% of the country’s GDP and 50% of the state budget. Moreover, public accounts show little deficit, according to Coface, the deficit will fall to 1.5% in 2018, however, when excluding hydrocarbon revenues, public deficit would rise to 7% of the GDP.

All that’s left to see now is whether Vladimir Putin will take advantage of his next six years as president to implement major economic reforms. In his 1 March speech, he showed that social and economic reforms were far from being his main priority, concentrating more on military and strategic issues. And the rise in oil prices will most likely not push the Kremlin towards reforms.

Risky environment for business

In terms of risk assessment, Coface gives Russia a B, which means the risk is quite high for the business world.

The business environment in the country is marked by state interventionism and corruption. Since his rise to power, Putin has developed a new kind of capitalism: state capitalism, 70% of the Russian economy nowadays is state owned. “When company heads are following the state, all is well, but if they don’t, then they can be prosecuted,” said Fruchter.

Such an environment causes the distrust of investors both inside and outside the country in regards to the sustainability of the Russian economy.

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