Every sector of the Russian economy is underpinned by oil’s performance.

If Saudi Arabia has bold plans to modernise its industrial base and to diversify its economy, Russia appears to have no such ambition. Although policy-makers in Russia have promoted a number of initiatives to expand non-hydrocarbon industrial capabilities in recent years, these efforts have not received sufficient financial or industrial support to make a real difference [[53], [54], [55]]. Meanwhile, as the leaders of other hydrocarbon-producing countries acknowledge the importance of preparing for a post-hydrocarbon future, official Russian energy strategies continue to emphasise the importance of increasing production and export of oil and gas [56]. As a result, Russia's well-established vulnerability to fluctuations in oil prices is likely to persist.

5.1. Russia's resource addiction

Although Russia was, in 2017, the world's second largest net oil exporter it has historically been a ‘price taker’ on international oil markets. It has never been a member of OPEC and has had a troubled relationship with the cartel, although it shares a need to maximize revenues from its oil industry. Subject to the average price of oil in a given year, revenues derived from the taxation of the extraction and export of oil and gas account for between one third and half of Russia's federal budget receipts [57].

The contribution of oil and gas to the budget does not, however, capture the importance of oil and gas to the wider Russian economy. Revenues generated by oil and gas firms are recycled throughout the economy in the form of either taxes paid to the government, or as demand for other goods and services produced in Russia [58]. According to calculations by Alexei Kudrin and Evsei Gurvich [59], cumulative surplus (cf. the base year of 1999) oil and gas revenues amounted to $2.1 trillion (in 2013 USD). These revenues ensure that demand for Russia's large manufacturing sector—the tenth largest in the world by value-added in 2014, according to UN data [60]—remains high. State transfers to social welfare recipients (the so-called byudzhetniki, which roughly translates as ‘budget people’ in English) maintain domestic demand, as does state procurement of goods and services, including orders for Russia's large defence-industrial complex, which continues to employ over 2 million people. It is this dependence of Russia's wider economy on oil and gas revenues that explains why Russia is so susceptible to fluctuations in the price of oil [61]. In this respect, Russia differs from the conventional ‘petrostate’ in so far as it has a large non-hydrocarbon sector. The problem is that much of the non-hydrocarbon sector is uncompetitive on global markets (hence the low share in Russia's export basket) and so therefore is dependent on domestic demand, which in turn is driven by the total value of oil and gas revenues [62].

The close links between the hydrocarbons sector and the rest of the economy are evident when looking at the correlation between movements in the volume of oil and gas receipts on the one hand, and movements in key economic indicators like GDP, investment, manufacturing output, on the other hand. Between 2001 and 2015, the statistical correlation between annual movements in total natural resource revenues, on the one hand, and with GDP (Pearson's r = 0.88), fixed investment (r = 0.84), and industrial production (r = 0.83) was extremely strong [61]. Until 2018, the price of oil was also the single most important predictor of the rouble-dollar exchange rate [61]. In the wake of the 2014 collapse in the oil price, the Kremlin allowed the rouble to depreciate, losing 60% of its value against the US dollar. This allowed the Russian Government to balance its books at a lower oil price—around $ 43 in 2018, and also reduced the relative production costs of domestic oil production.