Russia’s economy has been operating at a deficit since 2012, and poverty there continues to be on the rise. In fact, the World Bank predicts that the poverty rate will reach 14.2% in 2016. The country’s Reserve Fund is also expected to run out by 2017—just next year. Recently one New York Times economic analyst took an in-depth look at potential contributing causes to Russia’s struggling economy; here is a brief overview of those factors that are contributing to Russia’s economic instability.
Dependency on oil revenue
An economy that lacks in diversification when it comes to revenue is especially prone to seeing instability. In Russia’s case, oil and gas have traditionally brought in the greatest portion of revenue, accounting for 43% of revenue in 2015. Kimberly Marten, a political science professor at Barnard College and Columbia University, comments, “Russia’s economy never diversified away from oil and raw materials export dependence.”
After Russia annexed the internationally recognized Ukrainian territory of Crimea in 2014, the United States and European Union responded with economic sanctions aimed at targeting Russia’s financial, energy, and defense sectors. These sanctions have worked to multiply the effects of low oil prices. Russia, in turn, actually countered Western sanctions with import bans on various food products, causing the overall food supply to decrease and, in turn, causing those prices to rise.
The ruble has also been weakening in value significantly, having fallen almost 50% against the U.S. dollar since August 2014. A weaker ruble means more expensive imports for Russian citizens, making for an overall lower standard of living.
Increased defense spending
Back in 2008, Russia’s then-president Dmitri A. Medvedev announced a program that would modernize the country’s military by the year 2020. The program would involve building new military bases, updating equipment, and conducting vast military exercises. This past March, however, Vladimir V. Putin announced that Russia would immediately be withdrawing troops from Syria, and the country plans to decrease its defense spending by 5% this year. These changes in defense spending are likely due to the high stress that military expansion has been putting on the country’s budget; to date, the intervention there has cost Russia a whopping $482 million.
Dipping into reserves
Russia has traditionally maintained a Reserve Fund, largely financed by excess oil revenue; but as of late, Russia has been dipping into this Reserve Fund more and more as a response to economic shock. The fund has been depleted by 45% since September 2014, and finance minister Anton Siluanov estimates that the reserve could run out completely by 2017. Once the Reserve Fund is gone, Russia will need to look to another source—the National Wealth Fund, which is used primarily to fund pensions.