Russia's Dependence on Energy Consumption

June 4, 2013

One of the two largest oil producers in the world, Russia accounts for 12 percent of global output. Last year it again surpassed Saudi Arabia by pumping almost 10.4 million barrels per day (BPD). It is also one of the world's largest exporters of oil, with nearly 5 million BPD. Russia has increasingly used its revenues from energy exports to strengthen the Putin regime. Russia needs to lessen its dependence on profits from these resources if it is to avoid stagnation and possibly an economic crisis, says Leon Aron, resident scholar and director of Russian Studies with the American Enterprise Institute.

Vladimir Putin's commitment to oil and gas as the mainstay of Russia's progress stems from a deep and abiding conviction about its importance to the nation's economy. Long before he came to power, he had believed that "the restructuring of the national [Russian] economy on the basis of mineral and raw material resources" was "a strategic factor of economic growth in the near term."

  • From less than 50 percent in the mid-1990s, the share of commodities in Russian exports has grown to 70 percent today, with oil accounting for more than half of the export income.
  • Representing up to 30 percent of the country's gross domestic product (GDP) and half of its GDP growth since 2000, hydrocarbons provided at least half of the state's budget revenues last year.
  • Russia's dependence on energy exports and, consequently, its economy's vulnerability to commodity price fluctuation was highlighted by the 2009 world financial crisis. As oil plunged from $147 per barrel to $34 per barrel, the resource-based economy contracted by almost 8 percent -- the largest drop among the G20 top industrial nations.
  • In the last two years, the growing awareness of such possibilities has prompted the Kremlin to ease the tax burden on oil companies to stimulate investment in exploration and new technologies.

The inevitable and significant diminution in energy export revenues dangers Russia's economy. Its continuing and growing reliance on gas and oil for economic growth has put the country in a difficult position. Doing nothing in the face of lower oil and gas revenues also carries enormous social and political risks. With an effectively bankrupt state pension fund and a rapidly aging population, the Kremlin's ability to prevent a full-blown pension crisis will require a huge influx of gold and hard currency reserves. The regime needs to implement deep institutional reforms to create a better investment climate and diversify the economy if it is to survive as an economic superpower.

Source: Leon Aron, "The Political Economy of Russian Oil and Gas," American Enterprise Institute, May 29, 2013.

 

Browse more articles on Environment Issues