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Sanctions And Low Oil Prices Deepen Russian Recession

The Russian economy’s heavy reliance on energy, plus Western sanctions imposed because of Moscow’s role in the Ukraine conflict, have left the country in its worst financial position since the depths of the global financial crisis eight years ago.

The Federal Statistics Service reported Monday that its preliminary data shows Russia’s gross domestic product (GDP) contracted by 3.7 in 2015, due in large part to a 10 percent decline in retail sales over the year, including a 15.3 percent drop in December compared with December 2014, and an annual decline of one-third in foreign trade. Russia’s GDP had grown by 0.6 percent in 2014.

Related: How Soon Could A Sustained Oil Price Rally Occur?

The overall GDP drop exactly matched the forecast made by the International Monetary Fund (IMF) in the update to its World Economic Outlook issued on Jan. 19. The same IMF report said Russia’s economy would drop an additional 1 percent in 2016 before recovering with 1 percent economic growth in 2017.

About half of Russia’s annual budget relies on revenues from its prodigious production of oil and gas, but its budget for fiscal 2016 included cuts to virtually all sectors except defense and social services, and had been predicated on oil priced at $50 per barrel. The average global price of oil now, however, is around $30 per barrel.

Add to that the economic sanctions that the West has imposed on Russia since 2014 because of its suspected role in the conflict in neighboring Ukraine and its unilateral annexation of Ukraine’s Crimean peninsula and the depth of Russia’s economic problems can begin to be understood.

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But energy remains the chief factor in Russia’s current economic decline, according to Vladimir Miklashevsky, an economic strategist at Denmark’s Danske Bank who is based in Helskinki. “The economy’s going through big adjustments – it’s still addicted to oil,” he told Bloomberg by email. “It’s a long and painful journey to recovery.”

It’s no wonder. The price of oil has plunged from more than $110 per barrel in June 2014, and lost about 15 percent of its value since Jan. 1, 2016, largely because of Iran’s return to the global energy market, adding to the lingering oil glut. Similarly, the ruble has lost more than 7 percent of its value against the U.S. dollar since the New Year.

The retail sales figures for December show that the economy is hurting Russian consumers. Unemployment remained stable at 5.8 percent in December, but inflation was also steady at 12.9 percent, depressing the value of wages by 10 percent during the month. Elvira Nabiullina, the governor of the Bank of Russia, says she’s carefully watching the currency’s status and will make adjustments as warranted.

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There was one bright spot in the midst of the economic gloom. McDonald’s, the U.S. fast-food behemoth, announced Monday that it would be opening more than 60 new restaurants in Russia in the coming year.

Given Russia’s economic climate, McDonald’s has had to make “serious adjustments” to its business model in the country, but Khamzat Khasbulatov, the CEO for the company’s operations in Russia, says it’s met with success by relying on local suppliers and drawing up affordable menus tailored to the country’s needs.

“We have seen significant growth of our market share as we continued expansion,” Khasbulatov told BBC News. “The development of local supply has played a big role in supporting our profitability.”

By Andy Tully of Oilprice.com

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