Low Prices of Oil can Significantly Fuel Russian Growth

Economist of Capital Economics Emerging Markets Ms. Liza Ermolenko recently said that reduced oil prices might significantly fuel the future growth of Russia as the profits from exports of oil has been letting the government avoid policy changes.

The firm projects that if crude oil prices keep on falling to an expected rate of about $85 a barrel by year-end, it will improve the growth forecast of Russia in the medium term. The subsequent drop in export profits may lead to the widening of budget shortages by 4.5% of the gross domestic product and the present account balance sliding to a 1% of th GDP deficit this 2012 compared to the 5% excess of the previous year.

Ermolenko wrote that in those situations, the government will be pressured to start reforms for the purpose of wider growth in the economy.

The growth of Russia has been held back over the last decade as higher oil price benefits caused governments to hesitate in engaging in economic and political reforms. Such advantages also caused an impression of good policies of the government and hid shortcomings in the growth model of Russia and its suffering public finances.

In the 1970s, when high oil price increases stopped the government from embracing performance reforms of entire sectors, agriculture continuously deteriorated during the entire decade.

Ermolonko saw that all previous economic reforms happened with crude oil price history hanging at $30 a barrel. However, the desire of the government for changes usually lessened as crude prices start to rise again. The economist further added that high oil prices hampers any significant policy change, and ruining hopes for change to a new growth model that is led by investment.