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Plummeting oil and gas demand leaves Russia in trouble

Russia is in financial difficulties and has slumped into a depression after gas and oil revenues have decreased dramatically.

Russian gas giant Gazprom’s revenues are due to drop by a third after European demand has plummeted leaving the Russian economy in a precarious position.

Bad news for the eastern country with shoplifting already on the rise as living standards have dropped, due to the country’s dependence on gas and oil income.

Half of Russia’s tax income comes from oil and gas. Core inflation is running at 16.7% and real incomes have fallen by 8.4% over the past year, a huge blow to the economy. There’s no recovery in sight as Western sanctions remain in place and US shale production limits any rise in global oil prices.

Lubomir Mitov from Unicredit explained:

“Russia is going to be in a very difficult fiscal situation by 2017. By the end of next year there won’t be any money left in the oil reserve fund and there is a humongous deficit in the pension fund. They are running a budget deficit of 3.7% of GDP but without developed capital markets Russia can’t really afford to run a deficit at all.”

A worrying prognosis with Russian companies having to refinance in foreign currency debt to keep afloat raising concerns over the effect on economic growth and oil development

Mitov continued:

“They are still relying on old Soviet wells. They can’t keep up production without access to foreign imports and technology, so we think there could be a fall in output of 5% to 10% by 2018.”

This could have major implications for Russia’s position in the energy market and the resulting supply and demand balance.

Putin has stepped up with a long-term strategy to frack the shale reserves of the Bazhenov basin and the Volga-Urals. However it may not be feasible with current sanctions in place and Russia is yet to commandeer the technology required to make the projects viable. Average fracking costs sit at three times more than those in the US.

While the Russian authorities have allowed control inflation for now, it doesn’t look like their economy is set to recover in the near future.