Lower Oil Prices Push Russia Toward Recession

If sanctions, inflation and political risk weren't enough, falling oil prices are pushing Russia's already beleaguered economy toward recession.

The price of Brent crude oil, a global benchmark, hit a four-year low last week, plunging to below $83 per barrel from $116 in June. While it was just under $85 on Wednesday, there is considerable risk it could dip well below $80, costing Russia, whose budget gets half its revenue from oil and gas exports, billions of dollars, analysts said. Geopolitics and oil prices have already reduced Russia's budget by an amount equal to 4% of its gross domestic product.

A loss of "$10 per barrel costs (Russia) 500-600 billion rubles a year" — equivalent to $12.2 billion to $14.6 billion, said Natalia Orlova, chief economist at Alfa Bank, by telephone.

Cheap oil has further devalued Russia's currency, with the official exchange rate falling almost 20% this year to 41.34 to the dollar Wednesday. Months of economic instability largely due to Western sanctions over Russia's incursion into Ukraine have already taken their toll, with the latest round of sanctions cutting off Russian companies from Western financing.

The troubles in Russia — the world's eighth-largest economy — could have global repercussions. Deterioration of Russia's credit could affect the health of some European banks along with economies in Europe and Central Asia that rely on trade with Russia. Economic instability would be particularly risky for Russia itself, where President Vladimir Putin's rule at home owes much to the stability that's come from high oil prices and relative prosperity for the population.

Moody's downgraded Russia's sovereign debt from Baa1 to Baa2, the second-lowest investment-grade rating, on Oct. 17, adding further pressure on the ruble, potentially raising Russia's borrowing costs.

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