Russia warns cuts needed to avoid repeat of ’98 crash

The current budget for 2016, adopted late a year ago, assumes a $50 oil price and a deficit of 3 percent of GDP.

Oil was trading at less than $32 a barrel on Wednesday and has fallen by 70% in the past 15 months.

Measures totaling 1.5 trillion rubles ($20 billion), including a 10 percent cut in spending that spares outlays on the military and social services, are needed to avoid a shortfall of more than 6 percent of economic output this year, Siluanov said in a Bloomberg Television interview in Moscow on Wednesday.

In parallel, prime minister Dmity Medvedev said the budget would have to be revised should oil prices fall further.

Russia’s Finance Minister Anton Siluanov said Moscow would only be able to balance its budget with an oil price of $82 a barrel.

The Russian currency is approaching a record low of 80.1 roubles per dollar seen in December 2014, but its decline in recent days has been more gradual than the losses in global oil prices.

Government departments have been ordered to cut spending by 10%, repeating a policy imposed in 2015, Reuters reported.

“It has been a long time since our economy has been hit with such forceful and synchronised challenges” he said, citing oil prices and Western sanctions against Russian Federation over its role in the conflict in Ukraine.

“For commodity-based economies such as Russian Federation … the period of low commodity prices will be very long. 10% reductions is an optimistic forecast”, he said.

If the government fails to initiate austerity measures, “the same thing will happen as in 1998-99, with the public paying through inflation for our failures in correlating the budget with the new reality”, he warned, referring to a previous economic crisis which saw Russian Federation default on its debt.

Climatic conditions in Russia’s nothern regions, where many producers are located, and the conditions at some oil fields makes it technically hard to lower and raise production quickly.