Falling in oil prices has been a single largest cause of
celebration for countries like India that are not self-reliant on energy front.
Though the tumbling oil prices may not immediately translate into easing of
inflation but it will definitely help government to recover from the spiralling
burden of energy subsidies. (According to report, every $10 per barrel fall
in oil price can boost India’s economy by 10 basis points and improve current
account and fiscal balance by0.5 and 0.1% of GDP). Plummeting oil prices is a moment of great
trepidation as it evoked mixed response wherein cries of woes have far
outnumbered the shouts of joy. Low oil prices have begun to spell doom for the oil based
economies of the World which are going through phases of dramatic devaluation of
their currencies. The effects are slowly spilling to other countries even
European equities are too suffering biggest losses.
With nearly 50% fall
in prices with its peak three years ago, the effect is more pronounced on non–OPEC
(Organisation of Oil Exporting Countries) countries like Russia and Venezuela. International Energy Agency (IEA) predicts that oil prices might fall below $60 per barrel shortly. Increased efficiency of automobiles, weak economic growth and use of alternate sources of energy has reduced the demand for oil from
non-OPEC countries especially the US reduced the demand for oil resulting in lowering of oil
prices. It was anticipated that low oil prices might spike demand. But the
chilling prospect of drastic reduction in investments and infrastructure reduced oil trade. While controlling supply could was another
possibility with OPEC countries refusing to budge from their stance of production
cuts hopes of oil price revival has dashed out. Consequently, the
impending economic crisis is tipped to take a huge toll on Russian economy in particular.
Russia with its $450 billion reserves is finding it very
difficult to rescue the sinking economy. Its economy is very vulnerable
to any fluctuations in oil prices as nearly half of state’s revenues and
quarter of GDP is accounted by energy sector returns. Rouble is quickly losing
its value in the market and it fell by 17% in the last few days ringing alarm
bells. The shrinking oil revenues together with economic sanction packages
imposed by the West and European countries for meddling with Ukraine and
annexing Crimea in March has destabilised the financial architecture of Russia.
In a bid to offset the monetary collapse Russian central bank Rosneft increased
the interest rates to a historic 17% which will severely hamper future investments in
the country.
While the lavish infrastructure for
the Sochi winter Olympics in February 2014 and endemic corruption has reduced
the solvency, the free fall of Rouble has aggravated the crisis. The government
is trying to downplay the crisis by saying that Russia is going through a phase
of adjusting to the realities of international trade. But its companies and
banks scheduled to reimburse $120billion to International creditors by 2015
are hard hit. Rouble lost more than 50 % its value against dollar leading to
sharp increase in the cost of imports. Further, many people took mortgages in dollars
thus the cost of repayment has doubled for them in the past 10 months thereby Russian
people are paying high penalty. Its oil giant Gazprom recently expressed inability to sustain
business in the wake of slipping oil prices and announced a 25% reduction of
work force with immediate effect. While the Russian economy is sinking its
spill over effects might be felt by the West too. Germany could be hardest hit as
it is biggest trading partner with Russia. More than 350,000 jobs are tied with
trade between the countries. More than 6000 German companies have registered offices
in Russia with a combined turnover of $40 billion employing 270,000 people. No
nation is an island. With the collapse of oil prices sinking Russia economy would make huge financial dent on economies of its trade partners and business associates too.
Putin has been riding high on popularity charts with his nationalistic
agenda following the annexation of Crimea. With food prices increasing by 12%
and inflation set to touch 10% by 2015 financially burdened Russians might no
longer find Putin’s regime enchanting. Earlier leaders like Boris Yeltsin and
Gorbachev too were driven out of power due to economic recession. In a bid to
restore the imperial glory of Russia, Putin played a dangerously high-handed game
with the West. Now his fortunes are threatened by a political instability. As a
last move Russian government played yet another nationalist card by announcing
its plans of developing an independent space station. Undoubtedly, Russia with its
untapped resources will continue to dominate international arena in long run.
However financially aggrieved Russians are in dire need of a stable economy.
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