Russia’s Growth and Finance: Dependence on Oil Price Muted, Growth Trajectory Unclear, Balance Sheets Little Shaken

As the oil price rebounded in May, hovered around $40/bbl in June, and ascended a bit more in early July, the debate on whether economies can return to the pre-pandemic growth trajectory renewed in many countries despite high uncertainty. In some sense, Russia is lucky as this debate on a return to the previous growth trajectory makes no sense, given that it is not clear what this trajectory looked like in the past and what timeframe could be appropriate in search of such a trajectory. After the 2008-2009 crisis, Russia's growth from 2010 to 2019 averaged at around 1.9%, while in the past seven years, this figure was 0.9%. Both figures look equally unimpressive. Overall, the dependence of Russia’s economic growth on the oil price was muted since 2009, and in the second half of this period it was almost non-existent.

A weakening dependence of the Russian economy on the price of oil was observed in various areas, including the budget. In 2012-2014, the share of oil-and-gas revenues in the federal budget was above 50%, while in 2018 and 2019 it fell to 46% and 39%, respectively, and the budget was in strong surplus. This year it may fall below 30%, albeit the federal budget will be in deficit.

It is not the budget alone that became less dependent on oil, but the balance of payments as well. Crude and refined oil generated over 50% of total export revenues until 2015. Together with gas (natural and later accompanied by LNG) energy exports brought over two thirds of total export revenues until 2015. Since then, the share of energy exports declined, LNG started playing a greater role as part of Russia’s gas exports, and in 1H20 non-energy exports provided around a half of total export revenues.

It will be, of course, premature to say that Russia’s economic growth and finances do not depend on energy exports. However, this dependence has subsided, which gave the Russian government more room for maneuver – whether dealing with domestic policy issues or with geopolitics. Becoming less dependent on the price of oil, Russia feels less pressure to make quick and ill-conceived decisions, and therefore has a better bargaining position. As time goes by, more information becomes available, and better options can be chosen, as happened in April with the OPEC+ deal.

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