Board of Directors

As was expected by experts, such a decision immediately resulted in a collapse of Brent oil prices to $74.5 a barrel. It is to be noted that the reaction of the Russian Ministry of Finance to that dramatic news was a restrained one. According to Maxim Oreshkin, Director of the Department of the Long-Term Strategic Planning of the Ministry of Finance of the Russian Federation, the existing situation justifies the position of the Ministry of Finance that it is necessary to adapt the fiscal policy of the Russian Federation to new and lower oil prices which may stay at that level for quite a long period of time. According to Maxim Oreshkin, adaptation in the mid-term period consists in tightening of the policy of state expenditures and their possible optimization.

It is to be noted that, the need for optimization of budget expenditures became long overdue even before the OPEC's decision and a dramatic drop in oil prices. According to calculations of the Gaidar Institute, in the long-term period the Russian fiscal policy which at the first glance seems quite a strong one is under a serious threat which has two sources. Firstly, it is demographic trends, particularly, ageing of the population that become a factor behind substantial growth in expenditures on social needs (healthcare and pension security). Secondly, along with the above process it is an expectation of a drop in income due to a loss of oil and gas revenues. Interestingly, the reduction of oil and gas revenues is justified to a great extent not by a decrease in oil production and a drop in oil prices, but the gap between growth rates of fiscal revenues from the oil and gas sector and the economic growth rates. So, for stabilization of the Russian budget system a number of measures aimed at achieving higher efficiency of state expenditures and implementation of institutional reforms in the social sphere is to taken now. In addition to the above, the authorities have to look for new sources of income by means of introduction of other taxes in order to compensate the loss of oil and gas revenues.

As regards the prospects of economic development of Russia, as it was repeatedly stated before in a situation of the existing economic sanctions and a dramatic drop in oil prices the Russian economy may face a recession as early as next year because there are no new factors of GDP growth so far, while growth in the total factoring productivity (in other words, growth in the quality of other factors) can hardly be expected in the near future. On the one side, such prospects seem rather depressing, while on the other side, a substantial drop in oil prices may produce a favorable effect in terms of economic growth.

A high level of oil prices was favorable to the unprecedentedly high growth rates of the Russian economy in the 2000–2007 period, became a factor behind overheating of the economy, but permitted Russia to exit from the 2008–2009 crisis with smaller losses than it could have happened in a situation of lower oil prices. Until recently, high global prices on energy carriers helped the Russian economy achieve small, but positive values of economic growth rates. However, that favorable period seems to be over. It is a well-known fact that favorable foreign trade conditions slow down in basic terms the economic development of the country because the government lacks stimulus to carry out both radical reforms aimed at diversification of the economy and shifting of the emphasis from the oil and gas sector to manufacturing industries and reforms to promote the level of institutional development.

So, a dramatic drop in oil prices late in 2014 may become a turning point in development of the Russian economy and a kind of stimulus for a search for a new equilibrium. One would only like to believe that that equilibrium is based on quality restructuring of the economy and, as a consequence, new fundamental factors of economic growth.

Мaria Kazakova, PhD (Economics), Deputy Head of the International Department of Budget Stability Research