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Russia’s Reaction to Oil Price War - Yüksel Yasemin Altıntaş & Gökberk Bilgin

Revenues from hydrocarbon exports have mostly driven the Russian economy; even though the percentage of oil and gas export share in the Russian economy started to decline (in comparison to the 1990s), it still constituents an essential part of it.

A few months ago, international benchmark prices of oil were trading around $50 per barrel till the fail of OPEC and Russian oil cartels to agree on the production cuts. As an outcome of this agreement price of a barrel of oil started to decrease rapidly. Of course, the economic side effects of the Corona epidemic, weakening of Asian and European markets, also contributed to the fall of oil prices.

On March 9, 2020, after the OPEC-Russian meeting, prices dropped by 30%, which was the worst recorded fall in the last 30 years.

Russian Finance Minister Anton Siluanov indicated that even if the price of a barrel of oil drops to $30, the Russian economy can compensate that and continue its operations for four years. Moreover, Russian Minister of Energy, Aleksandr Novak, stated that Russia could increase its production further up to 500.000 barrels a day. On March 12, 2020, Russian Prime Minister Mikhail Mishustin made a speech in the cabinet meeting. He assured that the Russian economy is under control and has enough reserves to maintain financial stability.

However, experts such as Karen Vartapetov, are skeptical. He claims that Russia can hold on not more than three years if oil prices continue to remain at $35 per barrel. On the contrary, some economists like Vladimir Tikhomirov argue that even if budget spendings stay the same and oil prices remain at $35 National welfare fund should be sufficient enough to support the budget up to five or six years. It is hard to estimate in the existing informational convergence. The only thing for sure is, as Tikhomirov states globally majority of the oil producers will not be able to withstand current pricing (approximately $35/barrel) for long. As a result, production will fall, and prices will rise again. In between this period, oil producer states will experience direct economic losses.

When it comes to domestic consequences, Russians, especially the middle-income families, are scared of the possible long term consequences such as controversial changes in the national pensions and tax increases.

In response, at the beginning of the year, to stabilize the domestic concerns, the Russian president Putin called for an acute enhance in federal spending (around $65 billion). It increased payments to families with more than two children to make sure that they can meet their basic needs.

Nevertheless, this week the Russian Rouble lost 7.5% of its value while the oil prices continued to fall. Under these circumstances, it is highly likely that the Russian government will postpone some of the planned subsidies to the next years.

Before this crisis happened, Putin was also working on securing his position as a leader of Russia by changing the Russian Constitution. If this policy becomes successful, the Russian president will be able to stay in power until 2036.

Still, to establish the idea that no one else is capable of protecting Russian interests than Putin, he must convince the supporters by providing economic subsidies. Under these circumstances, following these policies with the oil price war may increase the burden on the government enormously.

Overall, Russians and Vladimir Putin have many subjects that need careful considerations. In 2014, in the Ukrainian case, Putin managed to gain the support of its people; however, his task is much harder this time.


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