Russian economy suffers from oil price collapse and coronavirus

US, WASHINGTON (ORDO NEWS) — Few Russian companies have been hit by lower oil prices and the coronavirus-induced self-isolation regime, just like Rusgeology, the country’s largest exploration company, reports The Wall Street Journal.

At the beginning of the year, Rusgeology was preparing to conclude contracts in the oil and gas sector for a total of $ 400 million. However, all these tenders were canceled or postponed until the price recovery, and as a result, Rosgeologia was forced to sell its assets for millions of dollars in order to ensure cash flow. According to Alexander Shadrin, an official representative of Rusgeology, measures taken in the quarantine field to curb outbreaks of coronavirus can also break existing supply chains and disrupt regular work throughout the country where drilling operations are being conducted.

“If we talk about the crisis in the oil field, the situation there is even more complicated,” he stressed.

The recession in Russia began in March, when the self-isolation regime in China and elsewhere due to the spread of coronavirus caused a drop in oil prices. The hesitation of Russian President Vladimir Putin in deciding whether to join Saudi Arabia and other major producers to curb production only exacerbated the problem, as a result of which oil prices reached their lowest levels in the previous two decades, and then only slightly recovered.

Today, economic pain is rapidly spreading, while Russia, a third of the budget of which is formed at the expense of oil revenues, has been poorly prepared to provide the economic support provided by the relevant programs in the West.

“This epidemic has dealt a severe blow to the economy,” Mr Putin admitted during a video conference with regional governors.

According to Wednesday, 308,705 cases of coronavirus infection were recorded in Russia (this is the second most infected result after the United States) and 2,972 deaths. Compared to April, the unemployment rate doubled and the number of unemployed amounted to 1.4 million, but Mr Putin warned that the most difficult period was yet to come. According to him, the approaching recession could exceed the recession of 2008-2009, when the period of growth due to high oil prices ended and when the country’s gross domestic product fell by 7.8%.

Maxim Reshetnikov, the Minister of Economic Development, believes that the self-isolation regime costs the Russian economy $ 1.3 billion daily due to lost production volumes, while the purchasing managers index, a key indicator of economic activity, dropped to the most in April low level since the beginning of its fixation in 1997.

The aftermath of the coronavirus pandemic now threatens Mr. Putin’s long-term plans to strengthen the Russian economy and support the declining popularity of the Russian president. It was originally planned to spend $ 400 billion on infrastructure projects, including the creation of new highways and high-speed rail lines.

According to the government, the volume of National projects will need to be reviewed, but their implementation, however, will continue. The same can be said of Mr. Putin’s plans for a series of constitutional changes that could allow him to remain in power until 2036.

PIK, the largest Russian developer, expects a leading role in the implementation of the construction program, which this year envisages the creation of 250 million square meters of housing throughout the country. However, quarantine measures temporarily halted all construction projects in Moscow and Moscow Region, and experts at this company believe that construction sector revenues will decrease by 50% or even 70% in April, and this is traditionally the most favorable month for sales. However, the situation may worsen even more.

“The biggest fear is the question of whether home and apartment owners will be able to service their mortgage debt,” said Yuri Ilyin, PIK’s vice president of capital markets and corporate finance.

A double blow in the form of a self-isolation regime and low oil prices is already exacerbating old problems such as poverty and declining living standards.

To alleviate the pain, Mr Putin announced last week that the government would offer tax credits and subsidized loans for businesses, as well as paying extra money to families with children.

Another problem is that low oil prices hit not only the Russian budget and ruble quotes – this year it is one of the weakest currencies in the world – but also the $ 165 billion National Wealth Fund accumulated in the years of stable oil prices. Lower oil prices mean less revenue for this fund, while officials are cautious in using it, given the uncertain prospects for oil prices. So far, 26 billion dollars have been taken from it.

“Putin really does not want to use the funds of the National Wealth Fund,” because it was mainly used to pay state pensioners, which are the basis of his electorate, said Leon Aron, director of Russian research at the Washington, DC, research center “American Enterprise Institute” (American Enterprise Institute). “If he is serious about spending the funds of this fund, then they will end very quickly,” he added.

While state-supported large oil companies are able to withstand the blow, smaller companies, which account for about 4% of the oil produced in Russia, are on the brink of ruin. According to the Russian Association of Independent Oil and Gas Companies, 128 out of 132 independent firms may go bankrupt. In Russia, the total number of people employed in this sector is more than a million people.

Meanwhile, some banks are worried about how the recession in [oil revenues] and the coronavirus pandemic will affect the economy of the country as a whole. Andrei Kostin, chairman of the state-owned VTB Bank, the country’s largest lender, calls on the government to more aggressively support businesses and citizens by compensating for lost revenue. According to the International Monetary Fund, the Russian fiscal benefits program is approximately 2.8% of GDP, while measures taken in the United States of this kind account for about 11% of GDP. Russian officials say this aid package will be increased.

Tatyana Shchepina, 37, who organizes concerts in Russia and throughout Europe for children with disabilities, was left without work, as her largest sponsors stopped transferring funds to her in early April. Today, she is trying to somehow make ends meet – to feed her 9-year-old son and provide a monthly payment of $ 170 for her car.

“Bank employees call me every day and threaten to take my car from me,” she said. She also added that on social networks, she started asking for help in the form of food.

Another alarming signal for Mr. Putin was reports that a strict regime of self-isolation, introduced to curb the spread of coronavirus, provoked protests among young Russians trying to make ends meet.

“People are already driven to the limit … they are in a desperate situation,” said Yegor Pospelov, head of the regional branch of the non-profit organization OPORA, a business support organization in the city of Kirov in western Russia.

In Moscow, 32-year-old Ramil Uruzayev says he can hold out for another month, retaining 50 of his employees who provide restaurant furniture cleaning services. His largest client, the Burger King restaurant chain, is closed, as a result of which he was left without cash, but is required by law to pay his employees wages, which he continues to do so far.

According to Mr. Uruzayev, he is trying to somehow get out, having only a small part of his usual income of 80 thousand dollars a month. However, he still has to pay $ 8,000 a month for rent, while a weaker ruble made cleaning products used at work 20% more expensive.


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