Russia: Oil and Subterfuge – 4/29/16

Few economies are more dependent on oil than Russia’s. Revenue from oil and natural gas accounted for about 1/3 of its government’s budget, over half of its exports, and the ruble is correlated closely with oil prices. With prices falling from $100 a barrel to below $30 a barrel, Russia’s GDP fell 3.7% in 2015 with another drop expected for 2016 as prices are expected to stay below $50 a barrel until the end of the year. And even if prices recover soon as Russian officials say, their expectations of an end to a long recession are overly optimistic. Enduring its second year of recession, the Russian government will likely run a deficit of 3.4% of GDP in 2016 and struggle to control the exchange rate of the ruble, the fluctuations of which have undermined recovery policies.

In contrast to Kremlin officials, the World Bank and the International Monetary Fund both expect the economic downturn to continue unless substantial reform takes place, a view shared by many private businesses in Russia.

“We are more cautious, more conservative and less optimistic in the private sector than government officials, who are traditionally more optimistic,” Mr. Aven, head of Alfa Bank, Russia’s largest independent lender, said as he cited state involvement and a lack of an competitive investment environment as reasons for the slow recovery.

Bank of Russia Governor, Elvira Nabiullina, recently repeated that the monetary policy will be focused on inflation control and the development of domestic capital markets in response to sanctions, both conservative moves suggesting a lack of confidence in a quick recovery.

“The pace of economic growth is our internal problem,” she said. “Whatever the oil prices are, even $100 per barrel again, we won’t be able to grow by more than 1.5%-2% without structural reforms and better investment climate.”

Sanctions imposed by the U.S. and the EU over various acts of Russian aggression towards neighboring states are unlikely to end soon. Despite divisions within European nations over Russia, Putin himself admitted that the sanctions will last “for the foreseeable future.”

Opposition to a natural gas pipeline from Russia to Germany is just the latest example of tension between the European Union and Russia, with some eastern members chafing under western leadership that ignores their energy needs. The pipeline is key to Russia’s plans to boost exports. The pipeline has met resistance from eastern EU members including Poland, Slovakia, the Baltic States, and Ukraine, which either get income from gas transit fees or wish to diversify their energy imports beyond an unstable and confrontational Russia, have called Nord Stream 2 “anti-European.”

“At the beginning there was a strong voice that this is a purely commercial project, but I don’t remember any commercial project that would be so intensely debated on a political level,” Sefcovic said in an interview in Bratislava. “It sparked an intensive geopolitical debate on the future of Ukraine and energy security of southeastern Europe.”

In addition, propaganda skirmishes between Russia and Western nations are adding fuel to the fire. Incidents like the “Lisa Affair”, a fake migrant rape controversy attributed to Putin’s regime as means of undermining Germany’s Merkel before regional elections, have only strengthened resolves against Putin even as some pro-Russian, anti-migrant politicians made electoral gains.

“Russia is starting to weaponize electoral processes in Europe,” said Joerg Forbrig, senior program director of the German Marshall Fund of the U.S. in Berlin. “The Lisa Affair was a real eye-opener.”

The moves by the Kremlin to influence German politics have infuriated Merkel’s government and led orders to probe the Kremlin’s role in such scandals. Germany already has a taskforce aimed at countering Russian misinformation; it works on the assumption that Putin’s goal is bolster pro-Russia parties. An official in Merkel’s Christian Democratic Union said almost all of the ruling coalition’s Russian-German voters have defected to pro-Kremlin AfD, which also appears to be getting funds from Russia, according to Alina Polyakova at the Dinu Patriciu Eurasia Center at the Atlantic Council in Washington.

In France, Marine Le Pen’s far-right National Front has received funding from a Russian lender and is seeking 25 million euros from others to bankroll its 2017 presidential campaign. Le Pen, Putin’s most prominent political supporter in western Europe, is currently polling second.

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