8 Shades of Crisis - Russia's Year of Economic Nightmares

Source: THE MOSCOW TIMES

Imagine Russia as a combustion engine. Oil and gas pumped from its vast territories wash through the economy as taxes, government spending and investment. Foreign currency from oil and gas sales is used to fund imported equipment and products on shop shelves. Cash from the energy industry flows through companies and into pay packets. Whether directly or indirectly, Russians have oil money in their pockets.
So while on the face of it, the energy industry accounts for only around one-quarter of Russian output, in reality it is the source of up to 70 percent of Russia's gross domestic product, according to research by Andrei Movchan, an associate at the Carnegie Center in Moscow.
That helps explain how, in the late 1980s, a halving in the price of oil precipitated the collapse of the Soviet Union.

The current shock engulfing Russia is even more serious, Deputy Finance Minister Maxim Oreshkin told a conference hosted by Vedomosti, a business newspaper, in December.
Russia's isolation from the world economy due to sanctions imposed over Moscow's actions in Ukraine last year have worsened the impact of an oil price crash.
The Moscow Times looked at eight aspects of the crisis.

Oil

If the oil price falls to $50 per barrel it would cost Russia some $160 billion in lost annual exports, Oreshkin said. By mid-December, the price of oil had fallen not to $50, but to less than $40, following a collapse of the market last year amid chronic global oversupply.
Russia's response was to maximize output, raising oil production to its highest since the end of the Soviet Union and ramping up exports of gas and metals, prices of which have also fallen sharply.

Source: State Statistics Service

This strategy has brought in extra money and preserved jobs, helping the country weather an economic contraction of around 4 percent this year. But it also undermined the future development of Russia's oil industry.
To maintain production volumes, oil companies are tapping easy-to-reach resources and neglecting investment in deposits that are harder to access, said Mikhail Krutikhin, a partner at consultants RusEnergy.
In the longer run, Russian oil output — which currently rivals Saudi Arabia at more than 10 million barrels per day — will decline sharply.