While the continued free fall of oil prices has contributed in part to another year of growth for the United States economy, the picture is much less rosy in Russia. With an economy that is highly dependent on oil and gas exports, the shrinking oil prices have hit Russia hard. Furthermore, the Russian ruble (RUB) has steadily weakened in the second half of 2015, and in November the Russian GDP shrank after a few months of incremental growth. All of this bad news begs a question: is Russia’s economy headed for collapse in 2016?
Sliding Oil, Sliding Ruble
At the year's end, the price of crude oil had fallen to $37 per barrel, down from about $60 per barrel in spring 2015. Oil and gas exports make up about 44% of the Russian GDP, and consequently, the ruble has tumbled all year; at year's end, it had fallen to 73.2 rubles to the dollar. On top of that, the Russian economy contracted in November after a few months of inconsequential growth—by the end of the third quarter, Russia’s GDP was down 4.1% from a year ago. In short, there are almost no strong indicators for Russia going into 2016.
Any attempts to predict the trajectory of the Russian economy in 2016 rest largely on projections of oil prices, and unfortunately for Russia, the projections are not strong. While some believe that oil is due for a turnaround sometime in 2016, the price collapse in the second half of 2015 was precipitous, and there are a number of reasons to believe that it won't get better anytime soon. (For more, see: Will Crude Oil Recover in 2016?)
The oil slowdown is largely a result of a current glut in supply. In this respect, one of the biggest problems has been the continued apparent refusal of OPEC nations to slow their production of crude oil. At a December meeting in Vienna, representatives from the 12 OPEC nations failed to agree on a drop in production levels despite the nearly 18-month collapse in oil prices. Any recovery in global oil prices is largely contingent upon a reduction in supply, and until OPEC asserts control over productions levels a price rebound is probably unlikely. (For more, see: Oil Stocks That Benefit From OPEC Overproduction.)
But oil collapse also has demand-side problems, largely related to a major shrinkage in Chinese consumption. This is partly as a result of their slowing growth, which is widely projected to continue for the near future. But the Chinese decrease in oil demand isn't just related to their economic slowdown. Between last year’s joint climate change agreement with the United States and the stipulations of the recent Paris agreements, China seems committed to a permanent slowdown in their consumption of oil. Even if China’s economy starts growing more quickly in 2016, the long-term plan to reduce China’s carbon footprint indicates a long-term downturn in demand for oil from what has been one of its biggest consumers.
A Formula for Failure
While the global price of oil isn’t entirely in Russia’s control, they are also not doing their share to help solve the problem. Russia contributes far less to the global oil supply than the collective nations of OPEC, but Russia is nevertheless a big part of the supply problem. For the last two months, Russian oil producers have been pumping out record amounts of oil, seriously exacerbating the current supply glut in the oil market. Even as Russia is suffering the effects of the dropping oil prices, they are simultaneously making the problem even worse.
This is a difficult situation for Russian energy and finance officials. With such a high percentage of revenue coming from oil sales, Russian producers have little choice but to ramp up production to make up for the decline in prices. But at the same time, they are making the problem much worse by continuing to flood the market with a product for which there simply isn’t enough demand right now.
Unfortunately for Russia, the current slowdown is simply the result of an economy that isn’t built for success. Russia’s dependence on oil doesn’t quite put on par with truly single-industry countries like many of the OPEC nations, but they have very few options for growth in other sectors. The persistent recalcitrance of Vladimir Putin on the global political stage has led to a series of stringent economic sanctions from most Western countries; furthermore, Russia has spent much of the year bailing out both lending institutions and oil producers, tapping into one of the nation's sovereign wealth funds early in 2015 to that end. All of this has backed Russia further into a corner.
The Bottom Line
Many economies could weather some of these problems, but one with Russia’s structural problems can hardly be expected to do so. Putin’s quarrelsome demeanor on the world stage doesn’t appear to be going away anytime soon, nor does Russia’s dependence on oil exports. Even if oil prices do eventually pick up, the 2016 prognosis for the Russian economy looks very grim.
