THE STATE OF THE EUROPEAN UNION

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THE STATE OF THE EUROPEAN UNION
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successful than those that preceded them in
terms of compliance, but it is clear that any fail-
ure to respect them could provoke an escalation
that could have very dire consequences.
The economic and political situation in Russia
The combined effects of economic sanctions
and collapsing oil prices are plunging Russia into
an economic downslide that could prove to be
as severe as the crisis that forced it to declare a
default in 1998 that had a negative ripple effect
throughout the world economy. Moscow has
already burned through a quarter of its foreign
currency reserves (estimated before the crisis to
be worth 480 billion dollars) helping Russian
companies (especially in the energy sector)
manage their international debt situations in
the face of sanctions that have cut their access
to capital markets and recapitalising banks de-
pleted by capital flight and attempt to shore up
the rouble, which nonetheless has lost 50% of
its value against the dollar.
Putin blames 25% of the slump of the
Russian economy on sanctions, which are ex-
pected to provoke a revenue loss of 32 billon
euros. However, given that Russia is the world’s
second largest producer of gas and petroleum
–which together account for 68% of its export
revenue2– the country’s most serious problem is
the download spiral of petroleum prices. A bar-
rel of Brent crude, which sold for 115 dollars in
July 2014, went for less than 50 in January
2015. Russia needs a minimum price of 80 dol-
lars a barrel to keep its economy afloat. A slide
to 60 dollars translates into an annual shortfall
of more than 80 billion dollars, which is almost
2
the amount of its total trade surplus with the
EU. Credit rating agencies have downgraded
Russian debt to junk bond status. Interest rates
have risen to as high as 17%, the rate of infla-
tion has soared as high as 10% and it is esti-
mated that the average household income has
decreased by 4.7%. Problems stemming from
the Ukrainian conflict complicate the economic
situation even further. The cost of bankrolling
Crimea is enormous: 2.6 billion euros in 2014
and forecasted to rise to 3.9 billion for 2015.
Financial support provided to the people’s re-
publics of Donetsk and Luhansk (which have a
combined population of 3 million) will probably
suppose an annual expenditure of anywhere
between 2 and 4 billion more.
According to the International Monetary
Fund’s January forecast, Russia’s economy will
contract by 3% in 2015 and the recession will
most likely last through 2016 with another con-
traction of 1%. Nevertheless, pessimists believe
that if the price of Brent continues to stay below
60 dollars a barrel, contraction could be as severe
as 4%. Although Putin has stated that he expects
the current downturn to end in two years, some
analysts have predicted it may last anywhere be-
tween three and five years, depending on the
evolution of oil prices. What is perfectly clear is
that although military spending will be main-
tained and international commitments met,
budget cuts of up to 10% are otherwise planned
across the board, infrastructure projects will be
paralysed and social benefits will be affected.
How long Russia can hold up under these
circumstances and whether or not they will
force the Kremlin to change its Ukraine policy is
an open question. Adopting an attitude that
Europe deems acceptable will certainly not raise
the price of petroleum, which is its greatest
problem, but an end to sanctions would provide
a certain degree of economic relief.