Much of the international media focused on Russian President Vladimir Putin’s colorful commentary on the Russian economic condition and the country’s place on the global stage during his annual press conference yesterday. But just as interesting was the emerging story that Putin is beginning to tell the country about its current economic collapse and what it means for Russia’s future.
In the past few months, the ruble has lost half of its value against global benchmark currencies such as the U.S. dollar and the Euro. The price of oil has fallen by about half as well, a crippling blow to a country that is deeply reliant on oil and natural gas sales to prop up an otherwise anemic economy.
Finally, sanctions imposed by the international community in response to Russia’s invasion of Ukraine’s Crimean peninsula as well as its continued support of an armed rebellion in the eastern part of Ukraine have further damaged the Russian economy.
In Putin’s telling though, while some lean years may face Russians in the immediate future, the cratering of the oil market will force positive changes on the Russian economy. As he told it in response to a questioner Wednesday, the oil and gas sector has been so profitable for so long that it has robbed other elements of the economy of needed resources.
“We are trying to create more favorable conditions for the development of production, but it is moving forward with difficulty. Especially when one can make large profits by investing in energy resources,” Putin said, according to a translation of his remarks provided by the Kremlin.
“As you may know, at least 80 percent of all applications to the Government (believe me, this is true) have to do with getting access to some field rather than investing in some high technology area. Why is this? Because the returns there are fast and big.”
He said the plunge in oil prices from over $100 per barrel to between $55 and $60 means that money that might otherwise have been invested in further oil extraction can be directed to other sectors of the economy.
“If the situation changes, then life itself will force us to invest in other industries. And this gives me optimism, strange as it might seem,” he said.
He added, “[W]e need to make use of the current situation to create additional conditions for developing production and economic diversification. I hope that the current state of affairs will make this possible.”
Of course, given the turmoil in the Russian economy, capital has not exactly been pouring into the country in search of investment opportunities. In fact, the opposite is the case. Those who are able have been shifting capital out of Russia. The Central Bank estimates that by year end, more than $125 billion in investment capital will have fled Russia.
It’s a nice story that Putin is telling his people. But whether or not it turns out to be just a fairy tale will be up to international investors.
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