Why Russia Could Benefit from Lower Oil Prices

Numerous benefits of high oil prices for the Russian economy have concealed the bigger picture that over the past decade they have also served as a hindrance to the much-needed political and economic reform, and hence, faster growth, according to a report by Capital Economics.

The report states that on the face of it, high oil prices are favorable for the Russian economy since they provide the revenues needed to balance Russia’s stretched budget and keep its current account in surplus. However, it points out that high oil prices create an illusion of good government policies, papering over the cracks in Russia’s growth model and its ailing public finances.

Capital Economics states that high oil prices bode poorly for reform. High oil prices have held back any meaningful change in policy and have dashed any hopes of a transition to a new, investment-led growth model.

Liza Ermolenko, emerging markets economist of Capital Economics, states that a fall in the oil price may be good news from Russia's perspective of medium-term growth outlook. It could lift the economy’s growth potential in the long term, even though the resulting instability would be detrimental for the ruble and Russia’s stock market in the near term.

The report mentions that it is hard to say with any degree of certainty by how much and for how long the oil price would need to fall to trigger reform. As long as oil prices remain high, it is unlikely that a marked shift in the policy would come about during Putin’s third term in office.