According to figures from the Russian government, the economy contracted 4.6 percent in Q2 due to lower oil prices, according to the Associated Press. The economy has also been damaged by western sanctions over the Ukrainian conflict, but a low-priced oil market is the main driver behind lagging output in Russia.
When Russian authorities decided to destroy tons of banned imported food items from the West, the government found itself in the midst of an outcry from the Russian public, including supporters of President Vladimir Putin. While Putin has gained strongly in the polls, as outside pressures from western powers galvanize the Russian masses in support of the government, the president’s popularity has suffered in the wake of higher food prices and a struggling economy.
The major trouble started in 2014, when oil prices on the world market contracted 40 percent, placing a heavy burden on oil-producing economies such as Russia. The market dictated over $100 a barrel, until an oil glut and waning demand drove down prices on the international stage. Currently, oil prices hover below $50, and Russia traditionally needed oil prices to be over $100 to keep the economy healthy and maintain budget obligations. Russia is the world’s second-largest oil-producing nation.
To make matters worse, Russia is in the middle of a gasoline shortage that could result in a shortfall of 5 million tons per year when 2017 arrives, notes CNN Money. This has resulted in rising gasoline prices, placing a further squeeze on consumers already contending with rising living costs. Gasoline prices climbed 6.3 percent during the first part of 2015, and one reason is a new tax policy meant to assist oil exporters.
The problem is that the tax hike affected oil refineries and mines, making production more costly. The tax increase aimed to provide a more balanced tax plan across the energy sector, but the new policy simply placed an added burden on another side of the energy field. Also, western sanctions disallow refinery producers from taking advantage of foreign technologies that could lower production costs.
Russia’s Export Market
By bolstering the export sector, Russia generates sufficient income while lowering dependence on high oil prices to keep the economy afloat. Russia increased exports by 27 percent in 2015, and Russians became the second-largest supplier of oil to China, with the Saudis coming in first. Russia’s energy-driven economy is largely dependent on exports, with Asia accounting for 26 percent of crude exports and Europe comprising 72 percent. Geopolitical tensions aside, Europeans get 30 percent of their oil from the Russians.