Why the Russian Economy Is Tumbling

By JASMINE C. LEE

Low oil prices and international sanctions have crippled Russia’s economy. The country has been operating at a deficit since 2012, and its Reserve Fund is slated to run out by 2017. Last week, the World Bank warned that the poverty rate in Russia is rising sharply.

Depending on Oil Revenue

One reason for Russia’s current economic situation is the sharp decline in global oil prices since June 2014. “Russia’s economy never diversified away from oil and raw materials export dependence,” Kimberly Marten, a political science professor at Barnard College and Columbia University, said in a recent email.


In 2015, oil and gas accounted for 43 percent of the government’s revenue.

Sanctions and a Falling Ruble

After Russia annexed Crimea in 2014, the European Union and the United States used economic sanctions to target Russia’s financial, energy and defense sectors. Western sanctions have multiplied the effect of the low oil prices, said Robert Kahn, an international economics senior fellow at the Council on Foreign Relations.Russia has very little debt, but sanctions have made it difficult for the country to borrow on international capital markets.Additionally, the ruble has fallen nearly 50 percent against the dollar since August 2014. This has depressed the standard of living across Russia, because a weaker ruble makes imports more expensive. Russia countered Western sanctions with import bans on various food products, leading to a smaller supply of those goods and further rising prices.The World Bank predicts the poverty rate will reach 14.2 percent in 2016.

Expanding the Military

On March 14, President Vladimir V. Putin announced that he would immediately begin pulling troops from Syria, reducing a military intervention that has cost Russia $482 million so far.Increased defense spending — at the expense of education, health care and infrastructure — has been a part of Russia’s return to the world stage. In 2008, Dmitri A. Medvedev, the president at the time, announced a program to modernize the country’s military by 2020. That overhaul, which has been expensive, included building new bases, conducting vast military exercises and updating equipment.Now, the expansion has ceased. Russia recently announced plans to decrease its defense budget by 5 percent this year.

Dipping Into the Reserves

Russia maintains a Reserve Fund, which has been supported by excess oil revenue, to protect the federal budget from economic shocks. But the fund has fallen 45 percent since September 2014 as the government ran larger and larger deficits. The finance minister, Anton Siluanov, has said that the Reserve Fund could run out by 2017.Mr. Siluanov said in a recent interview that Russia may need to dip into its other money supply, the National Wealth Fund, which is used primarily to fund pensions. It now holds $73.18 billion and has been used recently for infrastructure projects and bank bailouts.
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