For all the sanctions Western leaders can throw at Russia, the biggest threat to President Vladimir Putin’s ability to back separatists in east Ukraine is something beyond his or their control: the price of oil.
With Russia’s $2 trillion economy heavily dependent on crude exports, oil prices are always closely monitored by the Kremlin, but the government is particularly wary now as tensions with the West mount and sanctions ratchet up.
Such conflicts often push up crude prices, but as long as oil, which accounts for 40 per cent of state revenues, remains above the average $104 per barrel written into the 2014 budget, Moscow has little immediate need to worry.
The alarm bells will start ringing if it falls significantly below $100, forcing the government to pay more attention to propping up an economy already close to recession.
The International Monetary Fund warned in May that Moscow had no contingency plan for such a scenario, so a sustained tumble in the price of crude could even undermine Putin’s grip on power.
“If the oil price goes down to $75 and stays there for a few years, Russia will have regime change,” said a prominent Russian economist who asked not to be named.
“Two years ago I would have said $60, but now, given the lack of growth, the increase in corruption and sanctions, $75 would be enough.”
Such a scenario is not merely idle speculation; most analysts expect oil prices to fall in the coming years as new production, including from unconventional sources in North America, applies downward pressure to markets, with some forecasts going as low as $70 per barrel for Brent crude oil in 2020, down from over $105 currently.
A long-term decline in prices may be unlikely given the unrest in Iraq and the limited scope for Iran to increase output due to sanctions, but any substantial fall could derail the Russian economy.
Sergei Aleksashenko, a former deputy central bank governor and now a scholar at the Higher School of Economics in Moscow, said a $10 drop in oil prices would strip 700 billion roubles ($20 billion), or 5 per cent, from Russian budget revenues a year.
Economists estimate that a $10 price drop could rob Russia of 3 to 4 per cent in GDP growth.
“The most evident outcomes of any decline in oil price are destabilising of the balance of payments, devaluation of the rouble, rise in inflation and decline in budget revenues, decelerating of the growth,” Aleksashenko said.
The International Monetary Fund warned in May that Moscow had no contingency plan
“It is evident that the longer the period of reduced oil prices, the more significant the impact on the Russian economy.”
A drop to $38 per barrel in the aftermath of the 2008 financial crisis sent Russian GDP falling 7.8 per cent, and it shed $200 billion of reserves within a few short months trying to defend the rouble, which still lost a third of its value.
Its reserves, though still the world’s fifth largest at nearly half a trillion dollars, are more than $130 billion below their level at the beginning of the 2008 crisis.
The Finance Ministry manages two oil windfall revenue funds. One, the $87 billion Reserve Fund, has a clear goal to patch budget holes if the need arises.
Former finance minister Alexei Kudrin said in a recent interview with ITAR-TASS news agency that if oil were to fall to $80 per barrel, the fund could last for two years.
Some firms have already cut investment and others may follow suit as a result of the stand-off between Moscow and the West over Ukraine. Many cut investment after the 2008 crisis.
“The situation is difficult and most likely will lead to the need to revise the investment programme,” a source close to one of Russia’s largest oil producers said. “Everyone is pretending that nothing horrible is happening. It is very difficult to predict how the situation will develop.”
The annexation of Crimea from Ukraine in March boosted Putin’s popularity at home to all-time highs, but the Kremlin’s ongoing involvement in Ukraine and the economic price the country is paying is making business owners uneasy.