Low oil prices

Kremlin admits: the country’s economy is in danger

Walkers venture out into the cold in the center of Moscow.

(Bild: APA/ASSOCIATED PRESS)

The bloodshed in Ukraine has been going on for almost three years now. The Kremlin has long boasted about the supposedly flourishing economy in the aggressor country. But the reality seems to be different.

The Russian authorities are sounding the alarm: the economic risks are increasing, they say. Lower oil prices in particular are causing concern, according to reports from the Ministry of Economy and the Central Bank for a meeting with Prime Minister Mikhail Mishustin on February 4. These were seen by the Reuters news agency.

Budgetary restrictions and an increase in corporate loan defaults are also seen as risks. "A situation in which the slowdown in the economy, including a technical recession, occurs much faster than the decline in inflation is becoming increasingly likely," the report by the Ministry of Economic Affairs states.

Key interest rate of 21 percent
The high key interest rate of currently 21 percent is curbing lending and investment, which in turn threatens Russia's growth prospects. "The current lack of investment will lead to a lack of growth (lower growth rates) in two to three years," the report states.

On Red Square in Moscow

(Bild: APA/ASSOCIATED PRESS)

Both the Ministry of Economy and the Central Bank point to the risk of lower oil prices. These could lead to problems for the federal budget. The central bank's report highlights the "significant risk" of falling oil prices if a US production offensive were to flood the market. It also pointed out that the spare capacity of the member countries of the Opec oil cartel had reached a near-record level and was equivalent to the volume of Russian crude oil exports. "Budgetary constraints over the next five to ten years could be more severe than they currently appear to be," the central bank's assessment of the possible consequences of lower oil prices said. The Ministry of Economy and the central bank did not initially respond to requests for comment.

Decline in corporate profits expected
In its report, the Ministry of Economic Affairs states that it is prepared for far-reaching cost increases for companies. The cumulative increase in business costs - for labor, taxes, customs duties and interest expenses - is estimated at 14.8 trillion rubles (156 billion euros) this year compared to 2024. Unfavorable external conditions and falling domestic demand are making it more difficult for companies to pass on their costs to consumers. This will lead to a further decline in profits. All of this is putting pressure on the financial stability of companies.

Income from the energy sector accounts for around a third of Russian budget revenues. Higher oil prices are helping Moscow to get its budget deficit under control. This swelled to 1.7 trillion roubles in January alone. The sovereign wealth fund has become the main source of financing for the now persistent Russian budget deficit. The fund's liquid assets have fallen by around two thirds from 112.7 billion dollars before the war to just 37.5 billion dollars.