Russia finds itself in a double bind. It is subject to a number of sanctions from the European Union, USA and other trading partners over what they perceive to be undue involvement in the affairs of another sovereign state, Ukraine. For its part, Russia denies that it is involved in assisting Ukrainian rebels who wish to break away from the state and forge closer ties with Mother Russia (these separatists have strong ethnic links to Russia). Secondly, much of Russia's wealth comes from the export of gas and oil to the rest of the world. These income streams have been hit through the recent strong decline in oil prices which have seen the benchmark Brent crude fall from about $115 in August to about $70 currently.
A further source of pain for Russia is the exchange rate to the Rouble which has crashed by 40% this year and suffered a 9% drop earlier in the week when OPEC failed to agree to act to cut crude oil production. Any Russian export priced in Roubles will be more attractive in importing nations, but imported goods have effectively seen a huge mark-up in costs this year.
The upshot of all this is that Russia is predicting that its economy will shrink next year, falling into recession. Initial forecasts had expected growth of 1.2% for 2015, but these have been revised to suggest a contraction of 0.8%. This figure assumes an oil price of $80 per barrel, so if the oil price weakens further, the Russian economic contraction will be deeper (as noted above, crude oil is already well below this figure). Russia's central bank suggested that an average oil price of $60 for 2015 would result in a contraction of between 3.5 to 4% because of declining tax revenue.
Consumer, household income projections have also been reined in from projected growth of 0.4% to a decline of 2.8% which may hurt domestic demand as consumers tighten their belts.
There is speculation that Russia will need to increase its projected spending from its Reserve Fund well above the £5.9 billion projected for next year as it struggles to support the economy.
