Where Would Russia’s Economy Go With $40 Oil?

According to economists polled by Bloomberg, Russia would be most likely to pursue economic reforms if the oil price stays at around $40 per barrel. While such a price would lead to a considerable decrease in budget revenues, it would avoid the most painful consequences for Russia’s economy.

Danila Bochkarev, a Brussels-based EastWest Institute fellow focusing on economic security issues told valdaiclub.com what Russia’s economic outlook would look like in such a scenario.

“In the international context, oil at $40 would not allow for investment into increased capacity. As we are seeing now, there is a sharp reduction of investments into extraction. However, there has to be an adjustment for how strong the dollar is, compared to other currencies. The US is no longer the largest oil importer, and the real price of oil in euros is not as low as it is in dollars,” Bochkarev said.

However, there are solid reasons to consider $40 per barrel to be the optimal price for Russia to pursue economic reforms, according to Bochkarev.

“It would allow Russia to maintain a certain level of production, as well as invest into extraction and refining projects. At the same time, under the existing tax system for the oil industry, revenues from oil would be very minor, which would force the government to search for other sources of revenue, as was the case in the early 2000s, when the flat tax rate and other measures were made to increase the tax base,” he added.

According to Bochkarev, the industrial sector, as well as changes in tax policy could become new sources of budget revenues.

“First, there would be an increase of the industrial tax base, then, most likely, and increase in the income tax, as well as revenues from other sectors, such as agriculture,” Bochkarev said.

Bochkarev noted that currently, oil prices are low despite a relatively strong ruble, which leads to a budget deficit. This situation has led to a debate among economists about whether Russia should weaken the ruble to encourage industrial production, or to keep it strong.

“There is currently a rather paradoxical situation, in which there is concurrently a strong ruble and a low oil price, so the budget deficit may be above the three percent of GDP benchmark, so monetarists are against a strong ruble. But there is another point of view: to print more money and have it go to work in the economy. When the cost of money is high, there is no interest in investing into low-profit businesses, but when there is a lot of money that is loaned out at a low interest rate, the low-profit economic sectors begin to rise,” he added.

“The second point of view is also fair. The EU and US have attempted to revive their economies by printing money. For example, the European central bank is planning to print around 900 billion euros, which should jumpstart cheap credit, and with that, the economy. In Russia, inflation is much more complicated because of the small money supply. We have one of the lowest ratios of money supply to GDP in the world, it is several times lower than that of China,” Bochkarev concluded.

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