Russia Forces Government Agencies to Cut Spending

The Russian state issued a mandate forcing departments to slash spending by 10 percent as low oil prices plague the country’s finances, according to The Economic Times. Russia’s federal budget relies on high oil prices to make ends meet, and the added burden of western sanctions has not helped matters. Russian shares fell 5.0 percent this week due to lower energy prices and Asian market instability.

The Russian state issued a mandate forcing departments to slash spending by 10 percent as low oil prices plague the country’s finances, according to The Economic Times. Russia’s federal budget relies on high oil prices to make ends meet, and the added burden of western sanctions has not helped matters. Russian shares fell 5.0 percent this week due to lower energy prices and Asian market instability.

Experts predict that increased demand will alleviate oversupply in 2016, but there is no guarantee of this, and it would not be enough to save Russia’s ailing economy. The eastern country has traditionally relied on oil prices hovering over $100 a barrel, which is unlikely to happen anytime soon, and other analysts believe oil prices could fall as low as $20 a barrel as Saudi Arabia shows no sign of stalling oil production. Saudi Arabia not only sees North American shale producers as viable competition, but Russia as well, and the Kingdom is determined to squeeze non-OPEC producers to maintain market share.

Russia set up its own benchmark crude, known as ESPO Blend, which would have been a standard rate for much of Asia, but long-term contracts are coming to an end, and the Siberian crude is losing influence while failing to expand beyond major markets such as Japan and China. Moreover, a low-priced oil market and Chinese volatility forced officials to put ESPO aspirations on hold, and it places Russia in a tighter situation as leaders relied on an Asian pivot to counter western sanctions.

President Vladimir Putin signed major natural gas deals with China in 2014, but the Chinese market crisis leaves Russia with few options, and strong emerging markets such as Vietnam show more interest in trading with the West rather than the East. One card Russia has is its Eurasian Economic Union, which comprises member states such as Belarus and Kazakhstan, and even though the union will ultimately benefit Russia, it is not enough to pull the economy out of its slump.

Living standards for the average Russian have gone down, with consumer confidence at record lows. Western sanctions are one of the largest reasons why the economy is in such disarray, and Putin admitted in a recent interview that sanctions are hurting Russia to a great degree. With that, Putin remains popular as many Russians rally around their leader against European powers, but the undercurrent of frustration within the country cannot be ignored. The European Union extended sanctions on Russia by another six months in December, and the United States signaled that sanctions would remain permanent until Russia returns Crimea to Ukraine.