Downward angle icon Downward angle icon. Russia’s energy revenues have plummeted, and losing access to the US dollar could put the country in big financial trouble, economists say. Kirill Kudryavtsev/Getty Images The Russian economy is at risk of falling into a deep recession within the next year, according to economists at the University of California, Berkeley. The country is watching its energy revenues fall while losing access to the US dollar. This could hit Russia’s finances and further isolate Moscow from the global economy.
President Vladimir Putin’s claim that the Russian economy is doing well may soon be hard to verify.
According to Yuri Gorodnichenko, an economist at the University of California, Berkeley, the country’s economy is in serious trouble and is on track to fall into a deep recession within a year.
The main reason is that Russia is losing two things its economy desperately needs: robust energy trade and a steady inflow of US dollars, he told Business Insider.
Gorodnichenko said Moscow’s economy relies heavily on petrodollars, or dollars earned from oil and gas trading. But with sanctions disrupting Russia’s energy supplies, he said it was unclear whether sales to friendly nations would be enough to support the Kremlin’s huge war budget or whether Russia would have access to enough dollars immediately to import all the goods and resources it needs to operate its economy.
Gorodnichenko predicted that this could send the Russian economy spiraling into recession within the next 12 months.
“If they have to fund a war and they don’t have this source, it’s unclear where they’re going to get the money,” he added. “I predict they’re going to face a very serious downturn.”
The declining energy empire
Energy trading is Russia’s biggest source of revenue, but Moscow’s oil and gas business struggled last year, partly due to Western sanctions, with revenue for 2023 falling 24% to its lowest level in three years.
This decline poses major financial problems for the Kremlin: The war with Ukraine has become increasingly costly, and the government has budgeted a record high for the military for 2024. At current exchange rates, the country is on track to post a deficit of 1.59 trillion rubles this year, or about $18 billion.
“A quick calculation makes it clear that if Russia did not have petrodollars, it would face very difficult problems,” Gorodnichenko said.
The decline in oil sales means Russia will lose access to US dollars, as oil is traded primarily in them.
Given that the U.S. dollar is the backbone of global trade, a smaller pool of tradable dollars could further isolate Russia from the global economy. The dollar accounted for 88% of all foreign trade in April 2022, far more than any other currency, according to the latest data from the Bank for International Settlements.
Putin has emphasized Russia’s independence from the United States and its currency, moving to de-dollarize trade and create alternative payment systems with allies. But given the fact that Russia still imports “almost everything” from cars to food, furniture and other consumer goods, such actions will only bring the country closer to economic difficulties, Gorodnichenko said.
A historical look at Russia’s finances also shows that GDP and the amount of oil money available to the economy are highly correlated, Gorodnichenko said. Russia fell into recession during the global financial crisis and again in late 2014 when oil prices plummeted and dollar imports fell.
Gorodnichenko also noted that when the Soviet Union lost access to oil money, its economy collapsed within five years, and he suggested that Russia’s economic decline could happen even more rapidly, given that the USSR was far more self-sufficient in terms of resources than Russia is today.
“If they don’t have petrodollars to pay for all of their consumer goods, they’re going to have some tough problems,” Gorodnitskheno said. “Maybe. [resources] “They can borrow from China and a few other countries, but they can’t borrow globally. So if there’s an adverse shock, the impact will be amplified.”
Economists have been warning of the risk of economic disaster for Russia since 2022, when Russia invaded Ukraine and triggered a wave of sanctions that disrupted trade and finance.
Experts say the Russian economy is becoming more fragile as the war drags on. Even President Putin, who has touted Russia’s economic strength, acknowledges serious weaknesses in the country’s finances as it reels under high inflation, rising borrowing costs and soaring wages.