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Russian Federation is one of the world's leading
producers of crude oil and natural gas and a top exporter of metals
such as steel and primary aluminum
Russia is considered as a bookcase example of a
resource course-stricken economy with a growth model highly
dependent on the price of oil and thus the volatility of the global
oil market
Exports of manufacturing commodities from Russia
amounted to USD 231.8 billion in 2018 and USD 233.6 billion in
2019
In 2019, 29.6% of the real value of Russian exports was
due to crude oil. Refined petroleum products contributed 18.3% and
natural gas to 4.3% (thus exceeds 50.0%)
The exposure is steadily falling from 2010 onwards but
it's still very high
The impact of COVID-19 on the oil market in Q1 2020 is
drastic; high uncertainty and fear and a lack of agreement between
Russia and Saudi Arabia led to a collapse of crude oil price. It
could fall below of USD 30 USD/bbl
The collapse of the oil market is likely to bring
devastating consequences for trade, macroeconomic stability and
growth of Russia in 2020 with its diversity directly linked to the
scale, scope and duration of the global pandemic. The incoming
information from China shows that a downturn due to the outbreak
could last as long as a quarter and depends on the strictness of
contingency measures introduced
Introduction
Russia has undergone a significant economic transition since the
collapse of the Soviet Union, moving from a centrally planned
economy model towards a more market-based economic system. The
state of transition can be judged as partial with the pace of
reforms having significantly stalled in recent years.
The Russian economic model is characterized by a significant
role of oligarchs, high concentration of wealth and high internal
inequalities, privatization of most industries with exception of
several strategic sectors including transportation, energy,
banking, and defense-related sectors. The State remains an active
player directly or indirectly affecting or controlling the key
sectors and interfering with private property.
The Russian Federation is one of the world's leading producers
of crude oil and natural gas and a top exporter of metals such as
steel and primary aluminum. It is considered a bookcase example of
a resource course-stricken economy. The Russian
economy is profoundly dependent on the movement of world prices of
these commodities and in particular of crude oil. This exposure is
a major weakness of the state.
The Russian Federation has been a member of WTO since 22 August
2012. Following military intervention and the annexation of Crimea
(February 2014), international sanctions were imposed on Russia.
The sanctions were levied by the EU, the US and some other
countries and international organizations. The Russian Federation
responded with sanctions against other states e.g. a total ban on
imports of food from the US, the EU, Norway, Canada, and Australia.
The sanctions are still in effect. In December 2019, the EU
extended them until 31 July 2020.
The sanctions contributed to the exchange crises of the Russian
ruble and the Russian financial crisis. They also stifled economic
growth with some estimates putting it at 0.5-1.5% of foregone GDP
growth yearly.
Economic growth in Russia
Russian economic growth in recent years has been sluggish. A
combination of falling oil prices, international sanctions, and
structural limitations pushed Russia into a deep recession in 2015,
with GDP falling by 2.8%. The downturn continued through 2016, with
GDP contracting another 0.2%, but was reversed temporarily in 2017
as world demand picked up. After growing by 2.3% in 2018, the
economy slowed in 2019. The slowdown was explained by declining
energy exports and the impact of rising inflation on household
consumption. Government support for import substitution increased
to diversify the economy away from extractive industries. A
large-scale public investment plan for the period 2019-24 was
supposed to revive the economy in 2020. The current global
situation may obliterate these ambitious plans.
Trade of the Russian Federation
Exports of manufacturing commodities from Russia amounted to USD
231.8 billion in 2018 and estimated at USD 233.6 billion in 2019
according to the IHS Markit GTA Forecasting
database. In terms of trade volumes, these were equal to
respectively 125.9 and 125.3 million metric tons.
The main partners of Russia in exports (based on real values)
included in 2019: mainland China (13.0 %), Germany (6.6%), the
Netherlands (5.9%), Belarus (5.0%), the US (4.5%), Turkey (4.5%),
Italy (4.4%) and Poland (3.7%).
In 2019, 29.6% of the real value of Russian exports was due to
crude oil. Refined petroleum products contributed 18.3%. They were
followed by goods not classified by kind (7.1%), natural gas,
petroleum gases and gaseous hydrocarbons (4.3%), coal and coke
(4.3%) and basic iron and steel (2.6%). Dependency on extractive
sectors, mining and basic heavy industry is clear.
Russia suffers from a permanent trade deficit with imports
significantly exceeding exports both in terms of real value (the
deficit in 2019 exceeded USD 233 billion) and volume.
Imports of manufacturing commodities to Russia amounted to USD
460.2 billion in 2018 and USD 467.4 billion in 2019 according to
the IHS Markit GTA Forecasting
database. In terms of trade volumes, these were equal to
respectively 950.3 and 960.6 million metric tons.
The main partners of Russia in imports (in terms of real value)
included in 2019: mainland China (19.9%), Germany (14.3%), Belarus
(6.6%), Italy (3.9%), Japan (3.3%), the Netherlands (3.1%) and
France (3.0%).
Dependence on crude oil and natural gas exports - the
natural resource curse
The natural resource curse is a phenomenon in which countries
rich in oil or other natural resources fail to grow faster than
countries lacking access to these resources. It is extremely
difficult to be avoided. The availability of natural deposits
shifts investments from the dynamic industry sectors to rather a
static extractive industry sectors (manufacturing crowding out). A
short-run increase in income is quite frequently misallocated
towards higher temporary consumption in general or/and quite often
the wealth associated is taken over by the ruling elites.
Institutional quality seems to play an important role with
misallocations larger in institutionally weaker states. Countries
stricken by the natural resource curse become increasingly
dependent on and exposed to world commodity prices and volatility
in the markets.
The high reliance of Russia on commodity exports makes the
Federation extremely vulnerable to boom and bust cycles from the
volatile oil market. During the 1999-08 period as oil prices rose
rapidly globally, the Russian economy had impressive growth rates
(exceeding 7% on average). The global financial crises showed the
limits of the oil-based growth model. The growth collapsed in 2009
and then remained significantly lower steadily declining (with
contractions in 2014-15).
The share of crude oil, refined petroleum products, and natural
gases in Russian exports in real terms reached its maximum in 2010
- it was close to 65%. The share is decreasing but still
significant (it still exceeded 50% in 2019). The Russian economy is
slowly diversifying but has not been able to escape the curse. The
production of crude oil in Russia in recent months was stable and
exceeded 50 million kiloliters a month.
The evolution of oil market prices is highly unfavorable to
Russia. In the last year, the average crude price reached its
maximum in April 2019. It shows a declining trend in general.
During the last three months, it reached a maximum during the
escalation of the US - Iran crisis in the first weeks of January.
The outbreak of COVID-19 in China, the major black swan in recent
years, drastically changed the situation. Markets hate uncertainty
and react even worse to fear. The outbreak limited to China has now
become a global pandemic. According to WHO on 16 March 2020, there
were 167,511 confirmed cases globally and 6,606 deaths affecting
151 countries. The worse affected are China, Italy, Iran, South
Korea, Spain, France, and Germany. Europe has now become a center
of the pandemic and the number of confirmed cases is higher outside
of mainland China than in China itself. The number of cases in the
Russian Federation was equal to 69 at this stage with the outbreak
just beginning to gain pace and stricter measures slowly being
introduced.
The impact of the outbreak on the global economy will be
drastic. The oil markets collapsed in line with falling production,
outages, and decreased demand and trade flows. Furthermore, Russia
and Saudi Arabia failed to agree on further production cuts
providing incentives to further falls. The supply is currently
higher than demand - the price can thus fall below USD30/bbl. IHS
Markit reports the drop in first-quarter oil demand globally to be
the biggest ever recorded—down 3.9 MMb/d compared with 2019. If
uncertainty lasts, there is no chance of a reversal in market
sentiments. It could last a quarter or more. Coordinated actions at
the global level will have to be taken to rescue the world economy
in 2020 involving governments, central banks, and international
institutions. The situation of Russia similarly to other
resource-curse states will be particularly difficult. In addition,
the impact of the outbreak on the real side of the Russian economy
is at this stage unknown it will be related to the scope and size
of the outbreak on Russian territory. In general, we can assume
that the adverse impact could be larger in countries with weaker
institutional setups. Thus, the exposure of Russia could be even
higher.
Trade dynamics and forecasts
The growth rates in exports (real value) were equal to 2.16% in
2018 and estimated at 0.74% in 2019 according to the GTA Forecasting database.
Russian imports increased by 3.86% and 1.56% respectively. The
newest forecasts from IHS Markit for Russia (February release)
point to an increase of 2.58% in 2020 and 1.58% in 2021 and 1.38%
and 1.26% for the real value of Russian imports. They do not take
into account for the time being the impact of the outbreak of
COVID-19 on the global economy as well as problems in negotiations
with OPEC.
The monthly data from Global Trade Atlas show a
collapse in Russian exports from May 2019 onwards, with an increase
in imports. That could be partially explained by the exchange rate
movements with ruble appreciating towards USD and EUR.
Appreciation, in general, stifles exports and leads to increases in
imports.
The evolution of trade and economic growth is in line with the
evolution of PMI indices for manufacturing production and new
export orders. The readout was drastic in January with both indices
below 40.0 points but recovered in February 2020 (both above of
50.0). The value is likely to change below 50.0 in March as firms
will incorporate the inflow of information on the outbreak in their
forward-looking decisions. The prospects are adverse.
The IHS Markit interim forecasts from 9 March 2020 by the Global
Link Model team still pointed to positive GDP growth for Russia in
2020 but equal only to 0.8% and 1.7% in 2021. The prior forecast
from 26 November 2019 was equal to 1.63% for 2020 thus it was cut
by half. The likelihood of further adjustments in the forthcoming
weeks is highly likely.
