The Future of Russia's Economy with Oil Under $40 per Barrel
Danila Bochkarev, EWI Senior Fellow for Economic Security, takes part in a discussion organized by the Valdai Discussion Club, a partner of Russia Direct.
"In the international context, oil at $40 USD would not allow for investment into increased capacity. Today there is a sharp reduction of investments into extraction. However, there has to be an adjustment for how strong the dollar is, compared to other currencies. The U.S. is no longer the largest oil importer, and the real price of oil in euros is not as low as it is in dollars.
However, there are solid reasons to consider $40 per barrel to be the optimal price for Russia to pursue economic reforms. It would allow Russia to maintain a certain level of production, as well as invest into extraction and refining projects.
At the same time, under the existing tax system for the oil industry, revenues from oil would be very minor, which would force the government to search for other sources of revenue. This was the case in the early 2000s, when the flat tax rate and other measures were made to increase the tax base.
What might become new sources of Russia's budget revenues in this case? First, there could be an increase of the industrial tax base and in the income tax. The budget revenues might also come from agriculture.
Should Russia weaken the ruble to encourage industrial production or to keep it strong? Well, there is rather a paradoxical situation currently, when a strong ruble co-exists with low oil prices. That’s why the budget deficit might reach above the benchmark of 3 percent of GDP. So, today one of the recipes could be to print more money and let it go to work in the economy. It could bolster a weakening economy."
Read the full report here.