Russia’s reliance upon oil and natural gas

             Russia’s oil sectors date back to the 1960’s when major oil reserves were discovered in Western Siberia. During the Soviet era, oil production peaked in 1987 with the extraction of about 12 million barrels every day. Following the demise of Soviet Union the oil industry collapsed to about half of its previous output, mostly a consequence of under investment and uncertainty about property rights.[1] Privatization and the implementation of modern technology have reversed this trend and propelled Russia to become the world largest producer of oil.[2] The influx of petrodollars have also allowed Russia to grow at an average rate of 9% GDP per year over the last fifteen years, making the country the world’s ninth largest economy.[3] Yet this has caused the government to become overly reliant upon its natural resources and places the nations in a vulnerable position. What is particularly alarming is that the energy sectors accounts for roughly 75% of its exports, 30% of its GDP and almost half of the Federal Government’s budget.[4] This excessive reliance and lack of diversity in other economic sectors leaves Russia at the mercy of global commodity prices. This unhealthy reliance upon oil prices was never more evident than during the 2008 world economic crises, when the price of Brent Crude collapses to below $40.[5] During that same year Russia economy contracted by more than 9%. [6]  

            The rise in commodity prices over the past few years has propelled Russia growth but the Kremlin has also staked future growth of Russia on the expectation that oil prices will continue to grow. Russian growth for 2010 and 2011 was strong at around 4% GDP yet without diversification; continued growth at these levels will be unsustainable. The nation’s budget for the 2012 fiscal year was predicated on the expectation the price of Brent Crude would hold at $120 a barrel.[7] Furthermore, Sergei Alekasahenk, a former deputy central bank governor, has stated that oil prices would need to continue to grow at about $10 to $15 for the national budget to be sustainable. Other analysis’s at Russia’s Higher School of Economics warn that if oil prices fall below $80 per barrel the government will quickly expend its $60 billion emergency fund to meet its budgetary obligations.[8]   

            Excessive reliance on commodities has also resulted in Russia showing symptoms of “Dutch disease”. This economic phenomenon occurs when a there is a dramatic appreciation of a nation’s currency because of a nations reliance on its natural resources. When natural resource are exported the value of the exporting nations currency rises because they hold a greater supply of foreign cash reserves. This drives up prices and costs domestically, discouraging private sector investment and making manufacturing uncompetitive.[9] This makes it more difficult for Russia to diversify its economy and move away extractive industries into manufacturing and financial services. The countries extended reliance on oil and natural resources has resulted in the glaring weakness of its non-commodity sectors and great volatility in the nation’s economic growth.[10]     

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[1] IMF Report country report 12/217

[2] ID

[3] Doing Business in Russia 2012, Barker & McKenzie

[4] Sharples

[5] Oil dependency remains a fundamental weakness, Neil Buckley, Financial times 

[6] World Bank report- Spring 2013

[7] Oil dependency remains a fundamental weakness, Neil Buckley, Financial times

[8] ID

[9] Strategic protectionism, George Washington law review, Spring 2011

[10] ID