On Wednesday, Russia’s finance minister Anton Siluanov called for cuts in planned spending for 2015 due to the plunge in oil prices, and asked parliament to cut 10% of all expenditures except defense. Overwhelmingly dependent on oil revenues, Russia’s 2015 budget had been based on oil at $100/barrel, while the current price is around $46/barrel. Siluanov warned that if the average price in 2015 is $50/barrel, the government will lose over $45 billion in revenues. The World Bank expects Russia’s economy to contract 2.9% this year, with low oil prices, Western sanctions over the Ukraine crisis, and FDI flight all taking a toll.
The economic situation is grim for Russia, but it has large reserves to fall back on. Setting up sovereign wealth funds for the revenues during the boom years of expensive oil in the 2000s is proving to be prudent. Now Russia will unseal its $88 billion reserve fund to stabilize the ruble, which has lost over 40% of its value to the dollar last year and continues to fall. Russia will even increase total spending this year to stimulate its economy, even though the amount had to be lowered to 5% from the originally-budgeted 11.7%.
Belarus and Kazakhstan, Russia’s closest economic partners and political allies, do not have equivalent safety nets. The three nations form the core of the newly created Eurasian Economic Union (EEU), which went into effect on January 1 (additionally, Armenia is now a member and Kyrgyzstan will join in May). But already the EEU, which by 2025 is supposed to integrate member states’ economies into a single market with free flows of goods and labor, is failing to overcome internal squabbling. Russia’s economic problems are seriously harming its trading partners, who have been critical of Moscow’s actions and are seeking to shift their dependence away from it. This is precisely the opposite of what the EEU was envisioned to do.
When the West imposed sanctions on Russia in mid-2014 over its destabilizing of Ukraine, Russia responded with bans on many Western food imports. And after many attempts by Western suppliers to circumvent the ban with trucks from Belarus supposedly destined for Kazakhstan, Russia temporarily banned meat imports from Belarus, a move Belarussian President Alexander Lukashenko called “stupid and brainless.” Belarus has since had to devalue its currency repeatedly, losing 25% of its value to the dollar since mid-December. At the end of December, Lukashenko said the main goals for Belarus in 2015 are to diversify exports and reduce economic dependence on Russia. He also ordered the government to trade with Russia only in dollars, since the Russian ruble is losing value so rapidly.
Kazakhstan is faring slightly better but its Central Bank may be using its reserves to prop up its currency, and a devaluation is feared by many citizens there. More than anything else, Kazakhstan is alarmed by its overreliance on isolated and flailing Russia. In particular, Astana was not pleased by the restrictions of goods destined for Kazakhstan. So despite its EEU membership, it is eagerly opening up its economy to welcome foreign investors, especially from China and the West. A new “Invest in Kazakhstan” campaign, with major tax breaks, special economic zones, and other business-friendly measures mean to give the country more options than relying on Moscow. Like Belarus, Kazakhstan needs to shift its historic strategic orientation while being mindful of overdoing it. Russian intervention in Ukraine stands as a stark message.