News Article

Fading prices of fossil fuel is next major challenge for Russia’s ravaged economy

The economy of the world’s largest exporter of energy is heading into its deepest downturn in more than ten years due to the coronavirus fallout. There may be an even bigger crisis just around the corner.

Analysts at the Skolkovo Energy Centre, funded by the Kremlin, warned this month that the country is facing years of economic stagnation as demand for its carbon-heavy exports gradually falls. If Russia does not adapt, budget receipts will “decrease dramatically” and growth for the next two decades may be limited to less than 0.8 per cent per year, less than a third of what the Ministry of Economy is targeting.

For most of his two decades at the helm of Russia and for his own popularity ratings, President Vladimir Putin has relied on high oil prices as a backstop for economic growth. Now forecasters expect the coronavirus downturn to worsen the fall in global use of fossil fuel, with some also estimating the high was around 15 years earlier than anticipated by the Kremlin in 2019.

“Oil and gas are becoming mere commodities, without the resource rents that were the main driver of the Russian economic miracle in the early part of this century,” said Tatiana Mitrova, director of the Skolkovo Energy Centre. “The coronavirus crisis has probably made the economic forecasts of the think tank even bleaker,” she said.

The Kremlin shows no signs that it intends to move away from the current economic setup, under which nearly half of budget revenues come from energy exports. Earlier this month, Rosneft Chief Executive Officer Igor Sechin boasted to Putin about progress made at an Arctic oil exploration project and Gazprom began to design and survey work on a new China pipeline.

Crude prices have plummeted about 50 per cent as coronavirus lockdowns have sapped demand since the beginning of the year. Although the market has rebounded in recent weeks, the price of Russia’s export blend of Urals crude is still well below the $42 a barrel expected to support the Russian budget.

This year, the International Energy Agency forecasts a drop in global oil demand of 8.6 million a day, or about 9 per cent, while demand for solar and wind is rising. The European Union, Russia’s largest export market, wants to pursue a Green Deal at the heart of its plan to recover from the coronavirus pandemic by 2050 to become climate-neutral.

“All countries that are heavily dependent on fossil fuels have been saying ‘we have to change’ for many years, but they haven’t done it because it’s hard,” said Kingsmill Bond, a strategist at London-based think tank Carbon Tracker. “It’s no longer a matter of hope, it’s a matter of necessity because people just won’t want these high-priced fossil fuels anymore.”

In a low-carbon development plan released in March, Russia’s Economy Ministry forecasts that demand for coal will peak by 2035, and demand for oil by 2045. The ministry said Thursday it expects the gross domestic product to rise next year by 2.8 per cent and by 2022 by 3 per cent.

The strategy envisages reducing the Russian economy’s carbon-intensity by 9 per cent over the next decade. But greenhouse gas emissions, the world’s fifth-highest, would still rise on current levels by the middle of the century.

In a post-Friday Youtube, Kirill Tremasov, head of research at Loko-Invest in Moscow who is about to take on a new role as head of the monetary policy department of the central bank, warned that accelerating global decarbonization poses a major risk to growth. Anatoly Chubais, the architect of Russia’s privatizations in the 1990s, said just over a week earlier that the drop in oil demand is a threat to the country’s national security.

According to Bloomberg New Energy Finance, Russia ranks 109th in the world for renewable energy capacity. The Ministry of Energy aims to increase the share of renewable energy in power production from under 1 per cent by 2024 to 2.5 per cent, a fraction of what other countries are planning.

“Nobody raises these questions with Putin, no one can,” said Georgy Safonov, head of the Center for Environmental and Natural Resource Economics at Moscow’s Higher School of Economics. “Russia is like a huge ship on the wrong course. If someone wants to change some of it, it poses a risk to the whole ship.”

CIMB Bank - Best exchange rate SG > MY

Login to your account below

Fill the forms bellow to register

Retrieve your password

Please enter your username or email address to reset your password.