Russia has ability to tide over oil crisis

Updated: 2014-12-16 08:49

By Mei Xinyu(China Daily)

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The sluggish global petroleum market can be blamed on economic fundamentals. The sluggish trend, fuelled in no small measure by Western countries for their own gains, is likely to continue in the next decade. Petroleum and natural gas industries play a significant role in Russia's economy, which means the decline in petroleum prices will have a huge impact on Russia's fiscal revenue and currency exchange rate. If we travel back to the 1980s, we'll see that the sharp drop in petroleum prices hit the Soviet Union economy hard.

However, the Russian economy will not collapse, as some Western powers expect, because of the bearish petroleum market.

Compared with other emerging market economies which have also depended heavily on primary product industries over the past more than one decade, Russia is more capable of overcoming the crisis. Although Russia doesn't have as strong and highly efficient a state system as the Soviet Union, the core leadership of Russia is expected to be steady and stable in the next five to 10 years.

Russian President Vladimir Putin has passed many severe tests, including the Chechnya separatist movement and the global financial crisis, and won the support of the Russian people. Also, Russia's national production system and assets reserves are different from what they were in the 1990s. Although Russia's economic system is still rigid to some extent, the crisis will prompt adjustments.

So, we should not calculate the cost of Russia's petroleum and gas on the basis of the boom period. The advantage is that the serious depreciation of Russian ruble will reduce its production and transportation costs that are calculated in US dollars. So if Russia can improve its transportation networks, choose Chinese equipment and components to replace Western products (which it is already doing), it will further lower the production costs to fight the price war started by the Western powers.

Furthermore, the bullish market of Russia's primary products is a double-edged sword. Russia has suffered from the Dutch disease (decline of other sectors owing to the prosperity of primary product sectors) over the past decade. But the Russian leadership is trying to change the trend of deindustrialization in the country.

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