The rouble fell to its lowest level in more than a year on Wednesday as Russians faced the prospect of a second successive year of recession in 2016 amid continued oil price weakness.
The Russian economy is expected to contract 3.7 per cent this year, hit by falling oil prices and western sanctions, but officials had previously suggested the situation was stabilising with President Vladimir Putin saying the “peak of the crisis” had passed.
But the drop in the oil price has tempered those expectations and senior figures in the Russian political and business elite warned this week that the country should brace itself for further weakness next year.
On Wednesday, benchmark Brent crude oil fell more than 3 per cent to $36.64 a barrel as Saudi Arabia reiterated it would not cut production in response to lower oil prices after announcing a radical austerity programme earlier this week.
That helped to trigger a slide in the rouble to more than 73 to the dollar — its weakest level on record apart from a brief rout last December that threatened a run on the Russian banking system. By early evening in Moscow, the rouble was trading 1.2 per cent weaker, at Rbs73.1570 to the dollar, down 26 per cent since the start of the year.
“2016 will not be easier than 2015, and it could be more challenging,” Alisher Usmanov, one of the country’s wealthiest oligarchs, said in an interview broadcast on state television this week.
Alexei Ulyukayev, economy minister, said that Russia should prepare for oil prices to remain low “for years”.
Russian government data showed that the economy contracted month-on-month in November for the first time in five months.
“It all depends on oil, oil, and again on oil,” says Oleg Kouzmin, economist at Renaissance Capital in Moscow. “This current crisis has no concrete bottom.”
The recent weakness in the economy is hitting ordinary Russians particularly hard, analysts say. Government data published this week showed that real wages were down 9.2 per cent year-on-year in the first eleven months of 2015. That marks the first such fall since the economic turmoil of the late 1990s.
Sales of consumer goods — from food to cars — have fallen sharply, with retail sales down 13.1 per cent year-on-year in November. And according to state-owned pollster VTsIOM, 39 per cent of Russian households cannot afford to buy either sufficient food or clothing — up from 22 per cent a year ago.
Mr Putin struck a downbeat note on the economy at his annual marathon press conference earlier this month, warning of the prospect of a rise in the retirement age — although he repeated his insistence that the peak of the crisis had passed.
“Now it’s about managing expectations, particularly coming into 2016,” said Chris Weafer, a partner at Moscow-based consultancy Macro-Advisory, pointing to parliamentary elections due to be held next September. “The last thing you want to do is be talking about Russia being in recovery as people are becoming even more fearful about their income and their job security.”
It all depends on oil, oil, and again on oil
– Oleg Kouzmin, Renaissance Capital
The main reason for the change in tone on the economy is the further decline in oil prices, which in mid-November resumed their slide, touching 11-year lows earlier this month. Oil and gas account for half of Russian government revenues and the price of oil has a sizeable influence on confidence among businesses and consumers.
While the economy ministry is still forecasting a return to slight growth for the Russian economy in 2016, few share its optimism. The World Bank earlier this month trimmed its forecast to a 0.7 per cent contraction. The Russian central bank envisages a 0.5-1 per cent contraction should oil prices recover to an average of $50 next year, but a 2-3 per cent recession under a “stress scenario” of $35.
Russian officials have been warning the population to brace for the worst. Both Alexander Novak, the energy minister, and Alexei Ulyukayev, economy minister, have appeared on state television in recent days warning of a protracted period of low oil prices. Mr Novak blamed low prices on an increase in production from Saudi Arabia, which he said had “destabilised the situation on the market”.
“We cannot say the peak of our problems has passed,” said Aleksei Kudrin, a respected former finance minister, in an interview with Interfax. “Some time ago, many experts, myself included, believed that we had reached the bottom, or as they say, had passed the peak of the crisis. But today we see some further deterioration.”
While Mr Putin still enjoys sky-high popularity ratings of more than 80 per cent, the decline in ordinary Russians’ economic situation is a source of concern for the Kremlin, analysts say.
A protest by truck drivers from several Russian regions over a new electronic toll system has flared up in the past two months, in a rare sign of open discontent. A poll published on Wednesday by Levada Centre, a leading Russian pollster, found that 63 per cent of Russians supported the truckers’ position.
Mr Kudrin, who advises Mr Putin on economic matters and has long been rumoured to be due to return to government, warned that 2016 “will bring a serious challenge” for the country. He said that in some parts of Russia consumer demand was down 30 per cent ahead of the new year holidays.
Mr Ulyukayev, the economy minister, said of the fall in consumer spending: “We haven’t seen anything like this since 1999. Many of those who are working today simply haven’t experienced anything like this.”
Mr Weafer argued that the Kremlin’s response to the shooting down of a Russian jet by Turkey in November — restricting Russian tourism there and banning the import of a range of Turkish products — had combined with falling oil prices to deal a hefty blow to consumer sentiment.
“There was this general confidence that this would be a one-year recession,” he said. “Turkey and oil prices have led people to reassess the reality of the situation, and they found there was much less reason for optimism than they had previously assumed.”
Some of the Russian government’s recent actions have not helped its domestic economy. The embargo on the import of a range of Turkish and Ukrainian products is likely to contribute to higher inflation in the next few months. And the EU recently extended sanctions against Russia over its actions in Ukraine, saying it had failed to implement obligations under the Minsk ceasefire agreement.
“Geopolitical priorities are making the situation worse,” Mr Weafer said. “The key point for 2016 is: will the concern about deteriorating economy start to have a moderating impact on foreign policy or not?”