Oil is the life-blood of the Russian economy. At least it is supposed to be. Yet this truism is misleading. While a sharp fall in the oil price would bode ill for Russia, high oil prices don’t seem to insulate it from external financial shocks.
At almost $110 per barrel, the oil price has — so far at least — remained remarkably disconnected from the current euro zone worries.
Yet this doesn’t show in the Russian economy’s performance. GDP growth will come in at around four per cent this year — similar to last year, when the average oil price was some 30 per cent lower. What’s more, recent indications are that Russian growth is heading for a slowdown.
The conventional-wisdom rule of thumb was that each $10 rise in the oil price raised Russia’s GDP growth by around 0.5 percentage points.
Obviously something went wrong. Part of the explanation has to do with the convoluted way in which oil revenues impact Russia’s economy. Most of the windfall goes to the government in the form of taxes.
The problem is that Russia has increased government expenditures imprudently — by five per cent of GDP since the 2008 crisis — leaving little scope to use oil money for further stimulus.
More From This Section
The popular fixation with oil prices also neglects other growth drivers. Russia’s fast pre-crisis growth was partly the result of credit expansion, in turn largely financed by capital inflows.
Whereas in 2007 Russia saw a net capital inflow of $80 billion, this has turned into a net outflow forecast at around $70 billion (four per cent of GDP) this year.
There’s no simple correlation between these volatile investment flows and oil prices.
True, both foreigners and locals are also reluctant to invest partly on fears that oil prices are headed down.
But capital’s recent bolt for the exit also reflects generalised risk aversion, as investors normally shun emerging markets during international financial stress.
So even if the oil price holds up — and that’s a big “if” — Russia isn’t immune to economic contagion.
