In the earlier years, Russia was one of the countries with the richest economies. The most valuable resource in the country is energy, which contains almost 30% of the world's natural resources. The worth of this energy is estimated to be around $75.7 trillion. Additionally, the country has an abundance of oil, various precious metals and natural gas, which contribute a greater percentage of the country’s exports. In 2012, the revenue collected from the oil and gas sector contributed 16% of the GDP and over 70% of the country's exports2.
However, the Russian economy has faced a rapid and unexpected change that has impacted the global economy negatively. The global financial downturn in the country has outlined the serious challenges faced by the country regarding its economic policies. Although the country has been ranked the eighth largest economy in the world just after Brazil1, there is fear of a collapse of the Russian economy due to some reasons.
Fall in the prices of Oil
Oil is one of the country’s major exports and contributes a larger percentage of its revenues. However, the price of oil has kept on falling from one year to another. By mid-December, 2015, the price of oil had fallen to less than $40. This was a result of the fall of the market due to global oversupply. The country responded to this by maximizing its output and increasing oil production. Russia also ramped up exports of gas and metals, whose prices had also fallen sharply2. Despite the fact that this strategy contributed to extra money and preserved jobs, it undermined the future development of the oil industry in Russia. This is because, for the country to maintain the existing production volumes, it will have to tap the easy-to-reach resources and avoid investing in deposits that are not easy to access.
The fall of oil prices has cost the country $160 billion, which was lost in annual exports3. Regardless of fall in the oil prices, OPEC continues to pump oil to its customers at the existing rates to outdo its competitors in the market, while Iran targets to deliver a million new barrels each day in the market1. These factors have affected the Russian economy since it depends on such factors for almost half of the revenues. The only way Russia can balance its budget is through getting the oil prices back to $100 per barrel3. However, this can take some time. From the experts, the country is likely to experience another wave of recession in 2016. There will be a fall in real wages, declining ruble, and increased inflation rates. In the long- run, the country’s economy will continue to collapse.
The collapse of oil production in Russia has not only affected the country alone, but also the entire world. This is because it is one of the world’s oil producing countries and a fall in the volumes of oil production in Russia affects the supply of oil in the global market2. This has created a shortage in various countries where the citizens have experienced an increase in the oil prices. Additionally, a fall in the GDP of one country affects the world’s economy at large.
Sanctions
An economic sanction occurs, when customary trade or financial relations are withdrawn from a particular country due to foreign and security purposes2. This occurred in Russia. The fact that oil production fell sharply yet it was the main source of revenue left Russia vulnerable to international sanctions. The country depends on Western countries for the technology applied in pumping oil from difficult-to-reach shale and water reserves. Although China wanted more of the Russian oil and gas, it could not offer the country the technology it required to pump these resources. According to the IMF, huge levels of sanctions have cost the country almost 9 percent of its GDP3. This is one of the reasons the country has experienced a long-term decline in oil production.
As much as Russia may prefer exporting the little oil it produces, the Western sanctions have barred the oil industry from accessing the technology and expertise required. They have also curbed financial lending from the Western financial institutions to Russia. This has made the companies in Russia to repay their loans instead of seeking for finances from the Western countries, thus affecting the Russian financial system. It has also caused a fall of the Russian ruble's and the difficulties in the country's banking sector, hence adding unbearable weight to the existing burden of low prices of energy.
The sanctions have also delayed some of the Russian long-term projects. The Energy Ministry has withdrawn drilling from the Arctic Sea, and it is not supposed to return until 2020. This has pushed back the projects by six years, implying no development in the country until the period elapses. This can deteriorate the economy of Russia and even lead to the financial distress of the economy2. Russia has limited response to the current sanctions imposed. Options such as cutting energy supply to Europe are very drastic and have proved to be ineffectual. The country has decided to find a way in which the sanctions can either be removed or relaxed, despite the fact that the process may take several years.
Non-diversification
Focusing on the Russian trade, the country’s exports mainly consist of energy, raw materials, and agricultural commodities1. The country has failed to explore other sectors, and this indicates that failure in one of the sectors is likely to have a huge impact on the country’s economy. Thus, the success of an economy does not depend on its size, but its diversity. Russia should start considering other sectors such as the SMEs. Although they are small and insignificant in the economy, they are the foundations of strong and diversified economies in many countries across the world1. They initiate innovation and can easily respond to changing tastes of consumers and technology. In a well-diversified economy, the SMEs contribute almost 40 percent of the total GDP. On the contrary, in Russia, they contribute only 15 percent5. This has discouraged many entrepreneurs who have aimed at starting a business in the country. Thus, diversification is one solution to the falling economy of Russia.
Corruption
This one factor has not only deteriorated the economy of Russia, but also the world’s economy2. The level of corruption in Russia has increased from 3.5% to 7%. There are many forms of corruption in the country. These include unreported salaries, whose aim is to avoid paying taxes and other social payments to the government. Many experts believe that in the previous years, corruption was one of the businesses in Russia. There is also a shift in bribery. Previously, officials took bribes so that they could shut their eyes to legal cases but now they do so to carry out their legal duties. Thus, before an official performs a duty to the normal citizen, they must take a bribe. Corruption has consumed almost 25% of the Russian GDP, and it is practiced in all the sectors, including education4. The business environment has suffered from corruption due to the inconsistent laws and failure to practice transparency or accountability in public administration in the country. This has increased the cost of carrying out business in Russia and has impacted the market competition negatively as companies face some problems in acquiring licenses or permits.
The most important question the country should ask is who pays for corruption in the country? It is the citizens. For example, due to the high volumes of corruption, there is an increase in the tariffs for housing, water, and electricity6. The people of Russia pay all these increases. However, the government is trying to fight corruption, and it is believed that during Putin's second term, there will be few cases of corruption. The Russian Federal Anti-Corruption Law (RFACL) has been developed to fight corruption in the country. It requires all companies to get involved in anti-corruption programs and to take the initiative of fighting corruption at all levels.
Inflation and Interest Rates
Unemployment
The level of the official unemployment rate in Russia increased nto about 15 percent. This is due to the economic downturn in the country that has impacted the labor market. The number of the jobless people in the country has risen from 873,000 people to 935,000 people8. Additionally, the number of available jobs has also halved, creating instability in the jobs market. This is shown by the rise in part-time employment in Russia by 40 percent. Due to low levels of employment, the disposable income has fallen. This has had a negative impact on the country’s GDP. It has also led to an increased level of crimes such as theft since most of the energetic citizens are idle, yet they have to survive in one way or another.
This has also had an impact on the other countries across the world as most of the Russians move to other countries to look for jobs. Most of the people believe that there are greener pastures in countries such as the USA. This has created congestion in such countries due to the limited resources to cater for the additional population. The issue of insecurity has also increased in various countries because of allowing foreigners into their homes.
In conclusion, the only way for Russia to improve its economy is to solve high levels of corruption and unemployment in the country. The country's administration should initiate more programs as well as laws on corruption so that those involved should be punished appropriately. The government should also appreciate the roles SMEs in the country so that it can encourage the growth of small businesses. This can create job opportunities, and some of the jobless people may be employed. Lastly, the country should diversify its investments and not only rely on oil for more than half of its revenues. This can be a boost to the economy since many sectors will be contributing a given proportion of the national income. With oil as its main source of revenue, a decrease in demand or a fall in the prices of oil is likely to have a negative impact on its economy.
Bibliography
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