Falling Oil Prices Hitting Russia Hard

As discussed in an earlier blog post, oil prices are continuing to fall as global demand weakens, affecting economies around the globe, such as the United States, Norway, and Saudi Arabia. One of the countries most affected is Russia, which heavily depends on the oil industry, so much so that it makes up an estimated 60% of the country’s exports. The Russian government began the year expecting oil prices to be near $96 a barrel, and with current oil prices well below this number, there is reason to worry about Russia’s economy.

Russia’s heavy dependence on oil has not been a problem in recent years, as oil prices remained fairly constant. This situation has quickly changed, as oil prices have fallen dramatically since July. The main cause of this is a surge in global oil supply, which has lead to an abundance of oil in the market. The falling prices have not only hit Russia’s main industry hard, but have also occurred at one of the worst possible times. The Russian economy has already been feeling the effects of Western sanctions resulting from the Ukrainian-Crimean conflict, and the drop in oil prices has further intensified the power of the sanctions. These converging issues, along with other weaknesses in the country’s economy, have led the Russian Economic Development Ministry to announce that they are forecasting an economic recession for 2015.

With an economic recession most likely occurring in the near future, the Russian economy will have to hope that oil prices can rebound. While production has not yet slowed in the United States, further drops in oil prices could lead shale companies to hit their break-even point, causing drops in production. If shale companies begin to stop production, OPEC could decide to end the price battle, and reduce its production, stabilizing the oil prices, and with it Russia’s economy. Until the prices become stabilized, Russia’s economy will continue to limp along, as it grapples with the effects of oil prices, international sanctions, and government deficits.