Is Russia’s Economy Collapsing?
With prices in Russia increasing and food shortages beginning, the question is: Is Russia’s economy collapsing? Let’s look at the facts. First, energy prices are high. Then there are sanctions from Western countries. Those two factors have crippled the Kremlin’s economy, and some economists have compared the situation to a COVID-19 pandemic.
Russia’s economy is collapsing
The collapse of oil prices has hit Russia hard. Half of Russia’s budget comes from taxes on oil and natural gas. If prices fall further, the country’s economy is likely to continue to tank. However, the government is attempting to mitigate the problem by increasing pensions and increasing the minimum wage. However, the Russian economy is in deep trouble. There are several reasons for this. Let’s take a look at some of them.
One of the main reasons why Russia’s economy is in free fall is migration. It is estimated that 60% of Russian railway employees are at risk of mobilization. However, the RZD has not released the number of workers who may be taken. This situation is detrimental for the economy of Russia, which will be impacted by an exodus of workers.
The Russian economy is still in a better condition than many experts have predicted, though hardships are emerging for some Russians. The economy ministry once projected a 12% contraction, but now forecasts a contraction of only 4,2%. Meanwhile, President Putin has ordered a 10% increase in minimum wage and pensions. This means that even though the economy is already crippled, it will still be able to recover in time.
The Russian economy once enjoyed a great status as a world power. According to Angus Maddison, an economic historian, Russia had the fifth largest economy in the world in 1913. But by 1957, the U.S.S.R. was outpacing Russia. The Soviet Union was the world’s second largest economy, after the United States. The collapse of the Soviet Union caused the collapse of the currency and pushed prices of oil and natural gas higher. Since then, the Russian government has received petrodollars from the sale of energy.
Prices are rising
Prices are rising in Russia due to the recent conflict in Ukraine. The Russian invasion of Ukraine in February has led to economic sanctions and a surge in inflation. Food, household appliances and detergents now cost up to 30% more than they did a year ago. Gasoline prices are up by up to 6%. Consumers are turning to Telegram channels to find discount offers and bargains. The Federal Antimonopoly Service is investigating the problem and has been receiving complaints about rising prices. The agency has also conducted checks on baby food sellers and plastics companies.
Russian inflation is not a short-term problem. As sanctions start to bite, imports will likely dry up. Many companies still have Western parts and goods in stock but that supply will be scarcer. This will push prices up even higher. A recent survey from the Russian economic ministry showed a 14.5% annual rate of inflation. The price of sugar, a key input for many products including food and liquor, has risen by 37.1% in some regions.
According to the Russian central bank’s April survey, prices will increase another 20% to 40% in 2019. This means that farmers will have to pay an extra 20% to 40% to purchase their plants. Meanwhile, the bank expects inflation to fall to a moderate 5% to 7% by the end of 2024.
Food prices are rising
There is a shortage of certain goods in Russia, which is driving the rise in food prices. The lack of imported goods and foreign companies’ withdrawal from the country are both contributing to the situation. The latest figures from the Federal State Statistics Service (FSS) show that food prices are up 20.5% in Russia over a year. Among these items are sugar, butter, Grade A wheat flour, eggs, flour, salt, cereals, and baby food. In addition, some retailers have lowered their prices.
European sanctions on Russia are affecting the prices of basic foods. The country is the largest supplier of oil, gas, metals, and wheat to the world, and sanctions on its energy industry have led to a sharp rise in prices. The impact of Russia’s incursion into Ukraine has also contributed to rising food prices.
The increase in food prices will have an impact on every food consumer in the world. The world’s food supply has become increasingly constrained, and this is putting a strain on the food industry. The increase in prices will have an impact on the supply of food in America. As a result, supermarket shelves in the United States should remain stocked.
Despite the rising prices of cereals, meat, and dairy products, Russia is still a major supplier of grains. It accounts for almost one third of global wheat exports. But Russia’s invasion of Ukraine is forcing prices higher, and the consequences are far reaching.
Food shortages have begun to emerge
Russia’s invasion of Ukraine six months ago has disrupted global trade and pushed food prices upwards. Moreover, the country has blocked wheat exports, causing food prices to soar throughout the world. Furthermore, western nations have cut their imports of Russian energy, which has driven up fuel prices in emerging nations. As a result, the crisis has destabilized societies and rattled governments. As a result, a recession has been predicted in the country.
Russia has also begun to use its military reserves. This decision was taken after it was revealed that its weapons production capacity has been eroded by sanctions against the country. This led to the shutdown of two tank factories in Russia because of shortages of components. In addition, the freeze of Russia’s foreign-currency reserves has been praised by Treasury officials as it has prevented Putin from accessing a financial cushion.
Although the Soviet economic system was not responsible for the deteriorating economic conditions in Russia, it is still a factor in its economic condition. Moreover, the collapse of the USSR led to a huge rise in crime rates, and a dramatic decline in social services.
As the Russian economy collapses, the prices of essential ingredients such as wheat, rice, and oil are rising dramatically, putting further stress on the fragile food system. In addition, the costs of transportation are also high, making it difficult to distribute commodities. In addition, the soaring price of food and fuel is a further strain on household budgets.
Russia’s oil-dependent economy is in a deep recession
The Russian economy has been stagnant since 2014, with real disposable incomes declining 13 percent between 2014 and 2018. The oil price collapse caused Russia’s currency to fall by 59% against the U.S. dollar, causing inflation that forced the central bank to raise interest rates. As a result, the purchasing power parity in Russia fell to the lowest level of any major country, lowering living standards.
The Russian economy is expected to suffer a large fall in output this year. The government had anticipated growth of a little over one percent, but now expects a fall of six percent. This is due in part to a collapse in the service sector. It’s estimated that if the oil price stays around $25 per barrel in 2020, the economy will shrink by a further 6 percent.
While gas and oil exports have traditionally fueled the Russian economy, it has also proven to be a major source of funding. Before the 2021 spike, the country’s government received more than 10 percent of its state budget from gas levies. By comparison, oil provided more than 30 percent. But it’s important to note that oil is taxed more heavily than gas. In addition, it’s less different for exports and domestic use.
Despite these economic ramifications, the European Union has reacted by passing a range of policies to address the crisis. Among the most notable measures are bailouts for utilities forced to pay exorbitant prices for Russian gas. Germany recently approved a third support package that provides $64.3 billion in aid to consumers. This will soften the effects of the expected economic downturn by increasing consumer spending. It will also include measures to decouple electricity from gas.
The Kremlin’s optimistic scenario is that Russians tighten their belts and muddle through
The government has stated that the deficit will be RUB1.7 trillion, or around 3% of GDP, in 2015, but this will rise to RUB4.1 trillion if oil prices stay around $40 a barrel. The government is betting on the recovery of the oil market, which looks increasingly likely. That said, there is a political cost to the proposed cuts.
Meanwhile, Western sanctions have hit Russia’s largest banks, causing a further level of uncertainty. It is now illegal to pay rubles using Apple Pay in Moscow, and it is impossible to exchange rubles for dollars at any bank in the country. The plummeting ruble also makes the Russian economy look like a risky bet for lenders. In fact, 300 iconic brands have voluntarily halted operations in Russia since the invasion of Ukraine. Goldman Sachs and the Big Four accounting firms are among those that have ceased operations.
In the meantime, the Russian government is considering raising the income tax and retirement age in an effort to raise cash. But these changes are unlikely to be enacted anytime soon. The presidential and Duma elections are due in 2016 and 2018 and are expected to give Putin another term as president, meaning that any meaningful restructuring will probably be delayed until after those elections.
The biggest problem facing the Russian economy is falling investment. Until investment starts to increase, the country’s economy will be stagnant and will not recover.
