Will low oil prices be the end of Putin? Probably not. Meduza looks at the myths about cheap crude

Oil prices have been unusually low for several months. Russia finds itself in a new economic reality, just not the one that was predicted: the price of gasoline has fallen, and inflation is skyrocketing, yet support for the authorities is still high. Meduza looks at some popular preconceptions about cheap crude and explains why they don't apply in Russia.

Cheap oil will lead to a regime change in Russia

Probably not. Falling oil prices have directly affected the Russian economy – the influx of currency into the country has dwindled, the ruble has slumped, GDP has dipped, reserves have shrunk. Russia urgently needs to balance the budget and look for new ways to finance spending. Indexed pensions are now in jeopardy, as are the targets outlined in Putin’s “May Decrees.” 

So, the economy is floundering, but this doesn't mean regime change is coming to Russia. Events in Crimea and the fallout from sanctions has showed that Russians are willing to make sacrifices in terms of personal wealth, in the face of perceived aggression by Western countries (many believe that the fall in oil prices is part of a global conspiracy against Russia). One of hybrid political systems' main objectives, after all, is prioritizing the regime’s grip on power above all else, and the Kremlin’s efforts today are ever focused in this direction. It is possible that under the influence of external threats, the regime in Russia will change, but in all likelihood it would become even more authoritarian, not more democratic.

Putin meanwhile believes oil prices will rebound within two years, meaning the market should be back where he needs it by 2018, when he’s next up for re-election. For now, the Russian authorities may have sufficient reserve funds accumulated during the years of high oil prices: they can “top off” the economy at any sign of social tension.

Cheap oil will bring high unemployment

Probably not. It’s undeniable that unemployment and oil prices are correlated. In fact, the value of oil affects almost every sector of the economy, and more than half of Russia’s federal budget comes from revenues collected on oil and gas. Nevertheless, we should not think that there will be a drastic surge in unemployment in Russia. And here's why:

First, for the past 15 years, Russian social policy has been based on doing everything possible to eliminate social unrest. Russia prefers to have inefficient production and low unemployment, rather than vice versa. Large industrial companies can use the mechanisms of underemployment (already being done, for example, by car manufacturers) or limit pay raises (as well as partly illegal “grey” salaries), but layoffs are unlikely.

Second, Russia already dealt with an unemployment crisis in 2008-2009, when it managed to avoid serious disruptions in the labor market (not least due to cash injections). In 2015, anti-crisis measures also include the fight against unemployment.

The situation may become more severe in large cities, where many people are employed in small businesses — for example, since the beginning of December, in Moscow alone, about 900 restaurants have gone out of business. Nevertheless, even this will have only a limited impact on the labor market: in the big cities there are still a lot of vacancies and recently the market has actually faced labor shortages, not underemployment. So, given that migrants are now leaving the major cities in droves, there will be an abundance of unskilled vacancies. People looking for work in big cities aren’t likely to apply for state benefits, meaning they will look for work on their own, without adding to the official statistics on unemployment.

Cheap oil means cheap gasoline and food

Not really. The logic of "cheap raw materials = cheap end product" does not apply to the complex set of conditions in which the Russian economy now finds itself. Almost all consumption in the country is tied to imports — even with the cabbage and carrots grown in Russia, 75 percent of the price of these products is tied to foreign currency. The ruble fell and the price of consumer goods in the country began to rise, which has made inflation spiral upwards to levels not seen since 1999. Clearly, the ruble has depreciated against other currencies, as well as products — and in this situation it would be strange if gasoline prices fell.

The Russian economy has other peculiarities. For example, Russia actually experiences regular gasoline shortages, mainly due to repairs at its own refineries. (Russia has even had to buy gasoline from Belarus in increasing amounts.) In 2014, Crimea joined Russia, and Moscow had to start supplying it with fuel. According to the Federal Antimonopoly Service, this amounted to 140,000 tons of oil. 

Finally, according to the Kremlin’s own calculations, the value of oil determines only 10 percent of gasoline’s price, while federal taxes determine a whopping 50 percent. In the end, all that is achieved by reducing world oil prices is a "leveling off "of petrol prices in Russia. In September 2014, a quarter gallon (1 liter) of premium gas (92 octane) cost about 32 rubles. Today, in early February, the price is exactly the same.