- Oil windfall from Middle East conflict unlikely to revive Russia's slowing economy
- Putin urges officials to explain economic slowdown amid recession risks
- High borrowing costs and military spending hinder economic growth despite oil gains
The oil windfall triggered by the war in the Middle East is unlikely to help President Vladimir Putin revive Russia's sluggish economy that's teetering on the edge of recession.
Putin acknowledged publicly last week that the country's economy is in trouble, demanding that ministers and the central bank explain why growth is slowing despite his insistence that a downturn must be avoided.
The surging cost of oil due to US President Donald Trump's confrontation with Iran is boosting Russia's export income to the highest since the early weeks of Putin's 2022 full-scale invasion of Ukraine.
But that's unlikely to translate into faster growth amid some of the highest borrowing costs in the world.
The problem Russian policymakers are wrestling with is that massive amounts of fiscal spending are already swelling demand but not supply, as resources are increasingly funnelled into military production, much of which ends up on the battlefield.
Photo Credit: Bloomberg
Should the government decide to use the oil windfall to increase spending beyond what is currently planned, that would add to inflationary pressure, giving the central bank - which will hold its next rate decision on Friday - yet another reason to retain high borrowing costs that are weighing heavily on businesses.
Gross domestic product likely contracted in the first quarter after output fell by almost 2 per cent in the first two months of the year, which would be the first quarterly decline since early 2023.
Meanwhile, a measure of Russia's business climate turned negative last month for the first time since 2022.
The government itself appears pessimistic that oil prices will remain elevated.
Officials are set to keep their assumption for the average export price of Russian oil unchanged at $59 per barrel for this year in the latest update for the macroeconomic forecast currently being discussed, while also projecting a significantly stronger ruble than previously expected, according to people familiar with the outlook.
Taken together, that implies lower oil-related proceeds than what's assumed in the budget.
The government's press service didn't respond to a request for comment.
"While higher oil prices linked to the Iran conflict could generate an additional 1-3 trillion rubles in budget revenues in 2026, the Russian economy faces significant risks that high oil prices will not help it to avoid," said Natalia Milchakova, lead analyst at Freedom Finance Global.
Although the Bank of Russia has been cutting its key rate for nine months, lowering it to 15 per cent at its last meeting, real borrowing costs remain near historic highs at more than 9 per cent.
Photo Credit: Bloomberg
Expensive oil may help exporters, who account for roughly a quarter of budget revenue, but it cannot offset falling output and stalled investment under such tight fiscal conditions.
Under the current fiscal rule, all additional oil revenue above $59 per barrel is directed to the National Wellbeing Fund, while the 2026 budget law assumes that the fund will not be used to finance the deficit.
Still, government spending remains out of control in Russia, Milchakova said.
The situation in the Russian economy is more challenging now than in recent years due to the strong ruble, high interest rates, labor shortage and budget constraints, Russian Economy Minister Maxim Reshetnikov said on Friday.
"Our current records show that these reserves have largely been used up; this truly is the situation and the macroeconomic situation is substantially more difficult," Reshetnikov said.
The Middle East conflict itself is also now a factor forcing the central bank to tread more cautiously.
Policymakers fear it could trigger a global supply shock that pushes up costs worldwide, including in Russia.
Without that added uncertainty, officials would have more seriously considered a full one-percentage-point rate cut at their last meeting, Bank of Russia Governor Elvira Nabiullina said last month.
In a recent report, the central bank said that Gulf countries are major suppliers of key inputs used in the production of semiconductors and other high-tech goods.
As a net importer of electronics, Russia could see higher costs feed directly into consumer prices and corporate expenses, the report said.
Policymakers are also wary of rising logistics costs, and worry food prices could remain elevated far longer than oil prices.
'Deep-Shock Freeze'
Lowering inflation while maintaining moderate debt levels and a broadly balanced budget comes at the expense of growth and investment. Reshetnikov has warned that the government's full-year growth forecast of 1.3 per cent may be revised downward.
The central bank continues to describe the slowdown as a "manageable cooling" proceeding broadly according to plan.
From the business community's perspective, in the absence of sufficient investment, some sensitive sectors are effectively experiencing a "deep-shock freeze," Alexander Shokhin, head of the Russian Union of Industrialists and Entrepreneurs, told reporters earlier this month, according to the Interfax news service.
Until recently, Russia had been developing new technological niches and import-substitution industries, economists at the Institute of Economic Forecasting of the Russian Academy of Sciences said in a report last month.
Expensive money has made such efforts "prohibitively costly and economically unattractive," they warned.
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
