Russia has seen its economy experiencing significant volatility over the past few years. The country’s economy is heavily dependent on oil and gas production, so any drop in global demand or the price of commodities can have a direct impact. The recent coronavirus pandemic has put further strain on the economy and caused it to come undone. In this article, we’ll look at the reasons why Russia’s economy is starting to come undone, what’s been done already to try to prevent it, and what can be done in the future to rein it in.
Understanding the Problem of Russia’s Economic Unraveling
Throughout the last decade, Russia has been going through a period of economic turbulence, with rising inflation and sharp devaluations of the ruble. The low oil price over the past few years and increased Western sanctions have caused considerable damage to the country’s economy. The coronavirus pandemic has only served to worsen the effects, with lockdowns and travel restrictions further exacerbating the situation.
Economic growth has been in decline since 2013, and the government has forecasted a contraction of 3% to 4% this year. This kind of drop in growth is unprecedented since the collapse of the Soviet Union in 1991. The International Monetary Fund (IMF) has revised its projections several times since the onset of the pandemic, with the most recent report forecasting a deeper contraction of 5.8% for 2020 and a slightly recovery of 2.5% for 2021.
These gloomy economic figures are just the tip of the iceberg as far as Russia’s economic outlook is concerned. With rising inflation, foreign investment drying up and a preponderance of foreign debt, the country is in an increasingly precarious economic situation.
The Effects of Sanctions and Low Oil Prices on Russia’s Economy
The economic crisis in Russia can be seen as the result of two major factors: the imposition of Western sanctions and the dramatic fall in global oil prices.
Sanctions imposed by the United States, European Union, and other countries have been responsible for much of the decline in the Russian economy. The sanctions have created a climate of uncertainty which has discouraged foreign investments and strangled the country’s access to global financial markets. The banks and businesses subjected to the sanctions are unable to access the international lines of credit, thus furthering the economic decline.
Lower global oil prices have also put a lot of pressure on the Russian economy. As oil and gas exports make up roughly 40% of the country’s GDP, any decline in the global price of crude oil can have a major impact. The recent pandemic caused a massive shock to the global oil market and Russia saw a dramatic decline in its state revenues from oil and gas exports. This, in turn, has led to further economic decline.
What is Being Done to Combat Russia’s Economic Unraveling?
The government of Russia has taken several measures in an attempt to stabilize the economy. Most recently, it has unveiled a three-year economic plan which seeks to accelerate economic growth. The plan involve increasing public investments in infrastructure, boosting domestic consumption and developing new industries. The plan also contains an array of measures meant to stimulate private investments, such as tax incentives, state guarantees, and special financing programs.
The government has also implemented a stimulus package worth 5.6 trillion rubles (approximately $89 billion) to help the economy in the face of the pandemic. The plan includes income and social benefits, loan repayment assistance, wage supports, and other measures to help citizens and businesses weather the economic storm.
The Central Bank of Russia has also taken measures to contain the inflation. It has drastically cut interest rates (from 6.5% to 4.25%) and deployed several monetary policy instruments to support the financial system.
What Is Needed to Re-Stabilize Russia’s Economy?
While the government has taken several steps to mitigate the economic crisis, there is still a lot more that needs to be done. In order to bring the economy back to health, it is important that the government follows through on its plans to accelerate economic growth and implement reforms to address structural issues.
Structural reforms are needed to improve the investment climate and tackle the deep-rooted issues giving rise to the economic downturn. The government should focus on diversifying the economy, reducing dependence on oil and gas production, reducing bureaucracy and creating a supportive regulatory environment for businesses.
The country should also seek stronger ties with international partners in order to open up global markets and access to resources. Free trade agreements, foreign direct investments, and joint ventures should be encouraged.
Russia’s economy is in the midst of an economic crisis due to the fall in the global oil price and a series of Western sanctions. The economy has contracted significantly in the last decade, and the pandemic has only served to worsen the situation.
The government has implemented several measures to try to address the situation, such as fiscal stimulus plans and monetary policy instruments. However, in order to fully re-stabilize the economy and secure its future, there is more that needs to be done such as diversifying the economy, reducing bureaucracy, and improving ties with international partners.
