Russia suffers a contracting economy and high inflation

Bloomberg/Fuel Fix:
Russia, which relies on oil and natural gas for almost half its fiscal revenue, ran a budget deficit of 2.6 percent in 2015, the highest in five years. It’s now at risk of topping that level as prices drop even further, Finance Minister Anton Siluanov warned the government.

This year’s budget was initially planned around oil averaging $50 a barrel and a deficit of 3 percent of gross domestic product. Belt-tightening measures totaling 1.5 trillion rubles ($18.9 billion) are needed to avoid a shortfall of over 6 percent of output this year, Siluanov said.

While consumers were the main drivers of Russia’s economy for more than a decade, soft domestic demand has now become a primary hindrance to growth.

As cheap oil weakens the Russian economy, it also causes its national currency, the ruble, to depreciate. That means Russian consumers have to shell out more rubles if they want to maintain their consumption levels.

Geopolitical tensions have added to the ruble’s weakness. The currency has nearly halved in value since Putin’s annexation of Crimea in March 2014 and the U.S. and the European Union imposed sanctions against Russia.

Currency weakness accelerated inflation to a 13-year high of 16.9 percent in March 2015. Annual consumer-price growth eased to 12.9 percent in December, still more than three times the central bank’s goal.
Russia continues to eat into its reserves to finance it agenda of expansion in the search of lost conquests.  Like Saudi Arabia, the major petro powers are shrinking in their ability to influence world prices.


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