Takes More than 5 Facts to Explain Russia’s Economic Decline

The Times Magazine released an analysis explaining the 5 main reasons of Russia’s economic decline based on some high-caliber research by leading experts and organizations such as International Monetary Fund or Pew Research Center.

“For the first time since 2009 - low point of the global economic slowdown - Russia is in recession” - cites the publicationadding its economy will contract 3 percent this year, though Moscow’s $360 billion in cash reserves will cushion the immediate blow.” It summarizes that although Russia’s Vladimir Putin’s continuedattempt to assert Russian power on the international stage, it has become clear that he is now ruling a “submerging market.”

Among the other hard problems, lack of diversification, high dependence on its oil resources and no incentive to change are some very aspects, which can simply underline Russia’s fragility in this technology-based world of 21st century.

“For years, the Kremlin has supported and protected large state-owned companies at the expense of small and medium-sized enterprises (SMEs). But those smaller firms are the foundation of any strong and well-diversified economy. SMEs spur innovation and respond effectively to changing times, technologies, and consumer tastes. In the EU, SMEs contribute an average of 40 percent to their respective countries’ GDP; in Russia, SMEs contribute just 15 percent. Those are daunting figures for anyone looking to start a business in Russia” – the Times emphasizes.

With the subtitle of “at the Mercy of Oil Markets”, the analysis reviews Russia’s dependence on oil prices citing the price of oil has now fallen below $45 a barrel - welcome to the new normal. “OPEC continues to pump oil at historic rates as it tries to price out competitors, and Iran expects to bring over a million new barrels a day to world markets after the lifting of international sanctions. These are deeply troubling developments for Moscow, which relies on oil and gas sales for nearly 50 percent of its government revenues”.

According to the article, Moscow’s growing so reliant on energy sales leads it to the condition whenfor each dollar the price of oil drops, Russia loses about $2 billion in potential sales.“For Russia to balance its budget, oil will need to surge back to $100 a barrel.”

Considering Russia’s over-reliance on crude oil (up 40 percent of Russia’s state budget) - the country is left vulnerable to the current international sanctions. “Given the age of many existing fields, Russia will increasingly depend on cutting-edge technology from Western firms to pump oil from difficult-to-reach shale and deep-water reserves.”It seems that Russia’s endeavors to turn for help to Chinadoes not lead the country to alter the western market because of China’s lack ofthe technology Russia needs to draw those resources from the ground. According to the IMF the sanctions could eventually cost Russia 9 percent of its GDP.

At the same time, Russia, which vitally needs rapid technological and economic growth to endure those western sanctions and be a competitive force in the world markets, it has rather opted for something radically different.

Moreover, as the Time assumesRussians aren’t nearly as productive as for each hour worked, the average Russian worker contributes $25.90 to Russia’s GDP, while the average for U.S. is $67.40.

There are other deadly elements, such as endemic corruption, massive brain drain from the country, lack of freedom and no potential to change – all of these makeone hard to predict the Russia’s positive development in the near future.“It’s no surprise then that well-educated Russians are leaving their country in droves. Between 2012 and 2013, more than 300,000 people left Russia in search of greener economic pastures, and experts believe that number has only risen since Moscow’s annexation of Crimea last year”.

The article ends with the assumption that “Putin knows what his people want to hear however,It’s just not clear if he knows how to fix his flailing economy.” In summation, there might be five facts but more to explain Russia’s economic decline.

20 August 2015 19:57