Falling Oil Price Forces Russia to Squeeze Spending

Russia’s rainy-day funds are running out of money, necessitating 10-percent budget cuts.

View of Moscow's Red Square from Saint Basil's Cathedral, Russia, October 12, 2014
View of Moscow’s Red Square from Saint Basil’s Cathedral, Russia, October 12, 2014 (Brando.n)

With the international price of oil falling — hitting less than $30 per barrel on Friday — Russia is rapidly depleting its rainy-day funds and forced to implement 10-percent cuts in spending across the board.

Bloomberg reports that the Reserve Fund, one of Russia’s two sovereign wealth funds, is running out of money. There was only $50 billion left last month.

That may not suffice to cover this year’s deficit. Russia’s 2016 budget is $30 billion in the red and that assumes an average oil price of $50 per barrel.

Sanctions

The country can ill-afford to borrow much more as concerns about its economic prospects have pushed up interest rates.

Western economic sanctions, imposed after Russia occupied and annexed the Crimean Peninsula from Ukraine in 2014 and started supporting a separatist uprising in the southeast of the former Soviet republic, aren’t helping.

Nor is the embargo on European fruit and vegetable imports Russia imposed in retaliation. Prices rose nearly 30 percent last year, the state statistics agency has said. Inflation is now at 15.5 percent.

Structural weaknesses

Prime Minister Dmitri Medvedev announced on Wednesday that public spending must be cut 10 percent this year so Russia can “live within its means.”

The government said social security would be exempt from cuts, but the Financial Times reports that some regions have already stopped paying out pension benefits and indexing wages to inflation.

The squeeze underlines the structural weaknesses of the Russian economy. Oil and gas account for half of government revenues and 70 percent of exports.

Experts in- and outside Russia have repeatedly urged the government through the years to diversify the economy by relaxing controls and attracting investment.

Such advice is falling on deaf ears in the Kremlin where, as the Atlantic Sentinel has reported, President Vladimir Putin’s inner circle now consists almost entirely of hardliners anymore whose priority is Russia’s standoff with the West.