Russia has ability to tide over oil crisis

The sluggish global petroleum market can be blamed on economic fundamentals.

The sluggish trend, fuelled in no small measure by Western countries for their own gains, is likely to continue in the next decade. Petroleum and natural gas industries play a significant role in Russia's economy, which means the decline in petroleum prices will have a huge impact on Russia's fiscal revenue and currency exchange rate. If we travel back to the 1980s, we'll see that the sharp drop in petroleum prices hit the former Soviet Union economy hard.

However, the Russian economy will not collapse, as some Western powers expect, because of the bearish petroleum market.

Compared with other emerging market economies which have also depended heavily on primary product industries over the past more than one decade, Russia is more capable to overcoming the crisis. Although Russia doesn't have as strong and highly efficient a state system as the former Soviet Union, the core leadership of Russia is expected to be steady and stable in the next five to 10 years.

Russian President Vladimir Putin has passed many severe tests, including the Chechnya separatist movement and the global financial crisis, and won the support of the Russian people. Also, Russia's national production system and assets reserves are different from what they were in the 1990s. Although Russia's economic system is still rigid to some extent, the crisis will prompt adjustments.

So, we should not calculate the value of Russia's petroleum and gas on the basis of the boom period. The advantage is that the serious depreciation of Russian ruble will reduce its production and transportation costs that are calculated in US dollars. So if Russia can improve its transportation networks, choose Chinese equipment and components to replace Western products (which it is already doing), it will further lower the production costs to fight the price war started by the Western powers.

Furthermore, the bullish market of Russia's primary products is a double-edged sword. Russia has suffered from the Dutch disease (decline of other sectors owing to the prosperity of primary product sectors) over the past decade. But the Russian leadership is trying to change the trend of deindustrialization in the country.

According to the some media outlets, current Russian Prime Minister Dmitry Medvedev described "economy modernization" as a survival issue for Russia in his State of the Union Address in November 2009 when he was the country's president. He has said on several occasions that Russia should not depend on high petroleum prices as its main source of revenue and should change the trend of energy exports propping up the country's economy. He firmly believes that all sectors of the Russian economy should be modernized and has warned that corruption in North Caucasus is unprecedented.

The decline in petroleum prices has diminished the impact of the Dutch disease on Russia and provided the country an opportunity to revive its manufacturing industries. Different from Latin American and African countries which too depend heavily on the export of primary products, Russia is a country with people with high levels of education and innovation. Although they have problems in corporate management, Russian people are known for their tenacity during crises.

For China, Russia is a significant partner not only in business and trade, but also in key strategic fields. Russia has three major strategic interests similar to China: It has to resist pressure from Western countries, fight against the expansion of Islamic extremists in Central and West Asia, and maintain its rights over the Arctic Ocean.

Nevertheless, Russia's rigid economic system has caused losses to many Chinese enterprises. So China should support Russia politically and economically, and help it to follow international practices to create a better business environment. Perhaps a weakened economy will make Russians realize some populist demands and measures of the boom period were inappropriate and compel them to understand that some measures against China also go against their own economic interests.

The author Mei Xinyu is a researcher at the International Trade and Economic Cooperation Institute, affiliated to the Ministry of Commerce.