Can Russia Break Its Oil Dependence?

Despite improving oil prices, Russia’s economic growth is slowing, with GDP rise for the third quarter at 1.8 percent on an annual basis, versus 2.5 percent for the second quarter, Russia’s state statistical bureau, Rosstat, said earlier this week. Analysts say it’s the latest indication that Russia’s economy needs major reforms.

Let’s state the obvious: Russia needs an economy overhaul that will reduce the contribution of oil to its budget revenues. This overhaul is something that the central bank governor Elvira Nabiulina put a price tag on last year, warning that without it, GDP won’t be able to grow at a rate of more than two percent even if oil prices jump to $100 a barrel.

There is ongoing work on that overhaul, but it needs to speed up. Even so, analysts have points to make regarding that Q3 figure, and these notes aren’t about oil. For starters, Capital Economics says the reason for the GDP growth deceleration was a slowdown in the growth of the industrial production sector. Then, Goldman Sachs pointed out that when adjusted for calendar differences, the Q3 GDP increase was actually 2.4 percent on the year.

Now, some would say that for a country that only came out of a fairly serious recession late last year, Russia isn’t doing too poorly. It’s certainly not as dependent on oil revenues as some observers would like to believe. In fact, Russia is becoming the dominant force on another commodity market: wheat. Agriculture as a sector is a top priority for the Kremlin, especially in the aftermath of European sanctions that Russia responded to in-kind, banning a lot of food imports from the EU.

 Diversification is good, but Russia’s current economic growth isn’t a result of diversification of revenue streams, but of greater consumer spending—and this consumer spending, analyst Leonid Bershidsky says, is built on borrowing. Related: China Resumes Oil Hoarding Despite Higher Prices

Russia has seen an increase in real wages for more than a year now. This year, the central bank reduced interest rates as the economy got back on a growth track. Consumers are more confident. This has prompted consumers to borrow more, Bershidsky explains. They borrow more to spend more, on everything from food to real estate.

This state of affairs is actually sustainable, analysts note, but it doesn’t make for growth acceleration. Higher oil prices aren’t helping, either. It’s the same as with Saudi Arabia and all the other large producers: the higher the price of oil, the greater the temptation to slip back into the rut you’ve known for decades.

Can Russia resist the temptation? It’s hard to say, but it certainly has a strong motivation to do just that. Not just because of Nabiulina’s warnings, but because the fruits of diversification are evident: this year, Russia became the world’s largest wheat exporter. Perhaps too much of a focus on commodities is unhealthy for the long run, but on the other hand, if you’re rich in commodities why not put them to the best use you can?

By Irina Slav for Oilprice.com

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