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Business

Russia's recession woes deepen amid oil slump

Russian authorities are preparing a stress test for the economy based on oil prices of $25 per barrel. Meanwhile, analysts warn the country could be in for a world of pain if prices continue to plunge.

As oil prices fell below the psychological $30 (27.5 euros) per-barrel threshold, authorities in Moscow began to prepare a stress scenario for the economy based on an oil price of $25 per barrel. "We are preparing a stress test to be ready for every unexpected situation," Russia's Economic Development Minister Alexei Ulyukayev told Rossiya-24 TV channel last week.

With about a half of Kremlin's revenues coming from oil and gas exports, officials are keeping a close eye on prices. The country's 2016 budget is based on oil selling at $50 a barrel. According to this calculation, the budget deficit - the difference between what the government spends and what it takes in - should amount to about 2.3 trillion ruble(26.7 billion euros, $29.2billion), or three percent of the country's GDP.

In order to prevent this gap from growing amid falling oil prices, government expenditures would have to be "cut substantially," Prime Minister Dmitry Medvedev said Friday, and ordered all ministries and government agencies to submit proposals on which expenses to cut. Earlier that week, the Finance Ministry had recommended reducing spending by ten percent across all government institutions, Russian business daily Vedomosti reported, citing unidentified government officials.

Another year of recession

But analysts have warned that even deeper cut might be needed if

oil prices continue their slide

, dealing

another blow to the average Russian

, who has already been hard hit by the economic crisis.

Economists contacted by DW expect that oil prices will bounce back by the end of their year, to an average of $40-45 per barrel. Under this scenario, limiting the budget deficit to three percent of GDP is realistic if the government sticks to the ten-percent spending cut, said Oleg Kuzmin, chief economist for Russia and CIS at Renaissance Capital in Moscow.

Chris Weafer, a senior partner at Moscow-based research firm Macro-Advisory, pointed out that the Kremlin might try to limit the budget deficit by raising some special taxes. One option could be introducing a windfall tax for oil companies, he said. Weafer explained that Russian oil companies are making big profits due to the weakening ruble, since they convert their dollar revenues into the Russian currency.

At an oil price of $45 per barrel, Russia would face another straight year of recession, the analysts said. According to preliminary estimates, the country's GDP contracted by almost 4 percent last year.

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More and more Russians depend on soup kitchens for food

Risks for the budget

Still, this scenario is not even the worst case for the country's economy. If oil prices this year were to remain stuck at an average of $30, or even drop to $20, a barrel, Russia would be in for a world of pain.

According to an estimate by Citi, a $10-per-barrel decline in oil prices would shave off a full percent of GDP. This means that at $30 a barrel, Russia's economy would shrink by 1.5 percent, Citi warned in a note to investors.

But, added Citi, an even greater concern was if the budget deficit were to grow to 4.4 percent of GDP. That would deplete the Reserve Fund, Russia's rainy day fund, which held 3.6 trillion rubles as of January 1.

"While the situation is clearly challenging, Russia can still, for one more year, enjoy the luxury of financing its federal deficit by tapping the Reserve Fund," the note said. "However, should oil prices not recover by 2017, constructing future budgets will become an ever harder proposition," Citi added.

A blow for households

The shock scenario, with oil prices slumping to $20 a barrel, is now looking increasingly possible, said Weafer from Macro-Advisory - especially after Iran has announced plans to resume oil exports following the lifting of year-long sanctions. Under this scenario, Weafer forecasted, Russia's economy would shrink by six percent, while the budget deficit would reach eight percent of GDP.

In other words, Russian households should brace for another tough year ahead. Meanwhile, skyrocketing consumer prices will continue to weigh down on real incomes, which have already shrunk 3.5 percent over the past year, Weafer said.

In 2015, annual inflation hit a seven-year high, reaching 12.9 percent, according to the Federal Statistics Service. This year, the purchasing power of Russian consumers is also likely to weaken even further as a result of the fast-depreciating ruble, and as imported goods become more expensive.

If the average per-barrel price drops to $20, the ruble would likely drop to 90 rubles per dollar, Weafer predicted. Compare that to last year's 62 rubles per dollar. Weafer said he also expected the government to freeze public sector wages and keep the pensions increase at the minimal rate of four percent in an effort to further suppress expenses.

While the Kremlin dodged a bullet last year steering clear of growing unemployment, it likely won't be as luck this year if the recession continues, Weafer said. "That could create a very difficult backdrop for the Kremlin going into the September State Duma elections, especially if the budget cuts also hit social services, health and education spending", he added.

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