However, the Russian economy is heavily dependent on these industries, making it vulnerable to fluctuations in global energy prices and even Western sanctions.
In recent years, the Russian economy has faced significant challenges as a result of Western sanctions imposed on it due to geopolitical conflicts and regional events.
These sanctions targeted vital sectors such as energy, banking and defence, negatively impacting economic growth and foreign investment.
However, the Russian government is working to adapt the economy to these challenges by boosting domestic production, developing partnerships with other countries such as China and India, and increasing investments in non-oil sectors to reduce dependence on natural resources.
This approach aims to achieve greater economic flexibility and resilience to international pressures.
In this context, a report by Business Insider quoted a prominent economist as saying that “it may soon become difficult to prove Russian President Vladimir Putin’s claims that the Russian economy is in good shape.”
Moscow’s economy is in deep trouble and is set to enter a devastating recession within a year, according to economist Yuri Gorodnichenko of the University of California.
The reason for this, in Gorodnichenko’s estimation, is that Russia is losing two things that its economy desperately needs:
- Powerful energy trading.
- Steady flow of US dollars.
Gorodnichenko said Moscow’s economy is heavily dependent on petrodollars, or dollars earned through oil and gas trade.
However, with Russian energy flows disrupted by sanctions, it is unclear whether sales to friendly countries will be enough to support its massive war budget, or whether Russia will have enough access to dollars to import all the goods and resources its economy needs to function.
Gorodnichenko predicted that this would quickly push the Russian economy into recession in the next 12 months. He added: “If they have to finance the war and they don’t have these resources, it is not clear where they will raise this money from. I expect that they will face a very serious economic recession.”
circumventing sanctions
But Rami Al-Qalyoubi, a professor at the Moscow Higher School of Economics, said in exclusive statements to the Sky News Arabia Economy website that last year the idea of accumulating Indian rupees in Russia in exchange for oil exports was promoted, and doubts escalated about Russia’s ability to exploit its Indian currency, but trade continued, and India’s purchases of Russian oil reached 90 million tons of Russian oil last year.
“Realistically, Russian energy companies that pay taxes and supply oil would not have continued these supplies in these quantities if they were not properly paid for them,” he added, explaining that “there are alternative solutions to convert the rupee into hard currencies such as the dollar and the euro, although this requires a higher cost due to commissions, and in order to circumvent sanctions, and which may increase the burden on energy companies, but there is no room to talk about stopping supplies.”
He points out that Moscow was able to compensate for its losses in the European oil market through China and India, as the former bought more than 100 million tons of Russian oil last year, and exports to India rose from 5 million tons in 2021, to 45 in 2022 (the year the war in Ukraine began) and reaching 90 million tons in 2023.
Accordingly, Al-Qalyoubi does not believe that there is any room to talk about a recession in the Russian oil sector, in response to the analysis of the aforementioned economist.
suffering
Energy trade is Russia’s largest source of income.
But thanks in part to Western sanctions, Moscow’s oil and gas trade has suffered over the past year, with sales falling 24 percent to a three-year low in 2023, Business Insider reported, noting that “the decline poses a major financial problem for the Kremlin, as the war in Ukraine has become more expensive and the government has signed off on a record military budget for 2024.”
The country is expected to run a deficit of 1.59 trillion rubles, or about $18 billion, this year, at the current exchange rate.”
Returning to Gorodnichenko’s statements, he said: “When you do rough calculations, you realize very quickly that if Russia does not have petrodollars, it will face a very difficult problem.”
- The decline in oil sales means that Russia is losing access to the US dollar, as crude oil transactions are primarily conducted in the greenback.
- Reducing the amount of dollars that can be traded could further isolate Russia from the global economy, since the US currency forms the backbone of global trade.
- The dollar accounted for 88 percent of all foreign transactions in April, far more than any other currency, according to the latest data from the Bank for International Settlements.
Economic difficulties
According to the report, the Russian president exploited Russia’s independence from the United States and its currency, moving to eliminate the dollar in trade and establish alternative payment systems with its allies.
But these measures only push the country into economic hardship, Gorodnichenko said, especially given the fact that Russia still imports “almost everything,” from cars to food to furniture and other consumer goods.
“A historical look at Russian finances also shows that GDP is closely tied to the amount of petrodollars an economy has access to,” he added. “Russia fell into recession during the global financial crisis and later in 2014, when oil prices fell and reduced the amount of dollars it was able to bring in.”
Gorodnichenko also noted that the Soviet economy collapsed within five years when it lost access to petrodollars.
He pointed out that the economic decline in Russia could happen more quickly, given that the Soviet Union was more self-sufficient in terms of resources than Russia is today.
Since 2022, economists have been warning of the risk of economic catastrophe that Russia could face, when the outbreak of war in Ukraine led to the imposition of a series of sanctions that turned trade and finance upside down, according to the report, which stated that the Russian economy became increasingly fragile the longer the war lasted.
Even Putin, who has promoted a narrative of a resilient Russian economy, has acknowledged major weaknesses in the country’s finances, with high inflation, high borrowing costs and high wages.
Problems
Russian writer and analyst Dmitry Briga said in exclusive statements to the Sky News Arabia Economy website that the Russian economy depends on local currencies and certain trade targets, as Moscow can offer everything in exchange for something else to avoid Western pressures and sanctions imposed on Russia, which are trying to change the Russian position towards the Ukrainian file and prevent Russia from exploiting money in the war in Ukraine.
He added: “Russia’s strategy of relying on national currencies with countries such as India and China, and once the cooperation certificates are issued, may help solve the crisis.
While he stresses that Moscow “certainly faces problems due to the suspension of the SWIFT system, financial transfers, and sanctions imposed on companies and banks that deal with Russia, even friendly countries such as China, India, and others,” he points out that Russia deals with many countries, adopts a special economic policy, and concludes various deals in local currencies in order to circumvent Western sanctions and not be affected by those potential repercussions associated with the US currency.
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