Russia is a particularly interesting economy to study largely due to the fact that there is very limited research in the field. This is surprising given the scale of the economy, the potential for investors and track record of major financial reforms. This post will briefly touch on one of the main topics researchers discuss when considering Russia: the extent to which oil prices control the economy.
A variety of scholars have looked to oil prices to explain shifts in the Russian economy which was prominent during the Russian financial crisis years. While several causes have been considered including FDI/GDP, inflation, real interest rates, exchange reserves, stock prices and export growth, the overriding theme is undoubtedly oil prices across all available literature. Oil prices have been paid particular attention with regard to the 1998 crisis during which energy and metals plummeted causing a major fall in GDP per capita, ‘unemployment soared, and global investors liquidated their Russian assets… the Russian government was unable to rollover treasury bills maturing before the end of 1999’.[1] The impact of oil prices has also been associated strongly with an impact on currency evidenced by ‘the 80% real appreciation of the Russian ruble in 1998-2005’.[2] This paper suggests that movements in the ruble are fully consistent with the growth of oil export revenues also linking to ‘the international price of oil, and the sheer volume of the exported crude oil’.[3]
Despite the harsh consequences of the crisis, recovery was swift as GDP had declined by 5% in 1998 yet ‘in the following year the growth rate exceeded 5%, and accelerated further to 8% in 2000’.[4] It was widely accepted at the time that the role of oil had been pivotal as the Russian Prime Minister Kasyanov claimed in 2001 that ‘that a one dollar change in the price of a barrel of oil will change the total income of the Russian economy by USD 2 billion and federal revenues by 1 billion’.[5] To what extent has the role of oil continued in future Russian crises? Rautava argued in 2002 that ‘Russia is today much less vulnerable to oil price declines than before the 1998 crisis’. Interestingly, in 2013 Rautava revised this view in light of the 2008 crisis claiming that ‘Russia’s economy is still strongly influenced by international oil prices and that there seems to be no major difference in this respect before and after the 2008–2009 crisis’.[6]
One interesting factor having a profound effect on the power of oil prices in the Russian economy is the increasing dependency on international influences. Anatolyev has studied the Russian stock market between 1995-2004 and found that despite notable instability, ‘domestic factors have been playing a gradually diminishing role, while the importance of international factors has been increasing’.[7] Some of the most considerable international factors include the impact of US stock prices with the influence of gold reserves and credit balances declining dramatically. Kutan’s findings also support this notion as his analysis of stock and bond markets found through ‘movements in the U.S. stock market index Granger… indicates that Russian markets have become dependent on developments in global financial markets’.
Ultimately, there is a significant divide in opinion surrounding the dependency of the Russian economy on oil prices which appears to be a recurring theme in crises and has repeatedly prompted investors to consider other emerging markets without such a strong dependency on a single energy source. Possible explanations for this could include the fact that there is a lack of congruency between reforms being announced versus implemented in practice and the inevitable fact that any substantial changes in the core aspects of an economy would have to take place gradually as opposed to an overnight shift.
[1] Mete Feridun, ‘Russian Financial Crisis of 1998: An Econometric Investigation’, International Journal of Applied Econometrics and Quantitative Studies Vol.1-4(2004).
[2] Kirill Sosunov∗, Oleg Zamulin, ‘Can Oil Prices Explain the Real Appreciation of the Russian Ruble in 1998-2005?’, Centre for Economic and Financial Research at New Economic School (2006).
[3] Kirill Sosunov∗, Oleg Zamulin, ‘Can Oil Prices Explain the Real Appreciation of the Russian Ruble in 1998-2005?’, Centre for Economic and Financial Research at New Economic School (2006).
[4] Jouko Rautava, ‘The role of oil prices and the real exchange rate in Russia’s economy’, Bank of Finland Institute for Economies in Transition (2002). https://helda.helsinki.fi/bof/bitstream/handle/123456789/8190/103007.pdf?sequence=1
[5] Jouko Rautava, ‘The role of oil prices and the real exchange rate in Russia’s economy’, Bank of Finland Institute for Economies in Transition (2002). https://helda.helsinki.fi/bof/bitstream/handle/123456789/8190/103007.pdf?sequence=1
[6] Jouko Rautava, ‘Oil Prices, Excess Uncertainty and Trend Growth – A Forecasting Model for Russia’s Economy’ (2013).
[7] Stanislav Anatolyev, ‘A ten-year retrospective on the determinants of Russian stock returns’, New Economic School, Moscow.
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