Russian farmers
© seeds of the future, the traditions of the past.
The Kremlin has launched an incredible volte-face in economic policy and turned to traditional industries like farming in the face of tumbling oil prices

Russia has abandoned hopes for a lasting recovery in oil prices, bracing for a new era of abundant crude as US shale production transforms the global energy market. The Kremlin has launched a radical shift in strategy, rationing funds for the once-sacrosanct oil and gas industry and relying instead on a revival of manufacturing and farming, driven by a much more competitive rouble.

"We have to have prudent forecasts. Our budget is based very conservative assumptions of oil at around $50 a barrel," said Vladimir Putin, the Russian president. "It is no secret that if the price goes down, investment peters out and disappears," he told a group of investors at VTB Capital's 'Russia Calling!' forum in Moscow.

The Russian finance minister, Anton Siluanov, said over-reliance on oil and gas over the last decade had been a fundamental error, leading to an overvalued currency and the slow death of other industries in a textbook case of the Dutch Disease. "We should stop caring so much about the oil industry and leave more space for others. We have to take very tough decisions and redistribute our resources," he said.

Comment: "Dutch Disease" is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country's other products less price competitive on the export market.

The new $50 benchmark for oil is even lower than the Russian central bank's "extreme scenario" of $60 first prepared last year. The new realism has forced the Kremlin to ditch a raft of budget commitments and to stop topping up the pension reserve fund. Oil and gas taxes make up half the state's revenue, and almost 70pc of Russia's exports.

Igor Sechin, chairman of Russia's oil giant Rosneft, accused the government of turning its back on the energy industry, lamenting that his company is being throttled by high taxes. He warned that the Russia oil sector will slowly shrivel unless there is a change of policy. Mr Sechin said Russia's oil companies are already facing "negative free cash flow". They face an erosion in output of up to 6pc over the next three years as the Soviet-era fields in Western Siberia go into decline. "You have to maintain investment," he said

Rosneft, the world's biggest traded oil company, is facing taxes and export duties that amount to a marginal rate of 82pc on revenues. "This is enormous, it's unbelievable. The attractiveness of the oil industry is all about tax rates," he said. He stated caustically that the government cannot seem to make up its mind how to tackle the economic crisis, openly attacking ministers sitting next to him at the VTB Capital forum. "We have lots of models but unfortunately we are failing to see any actual growth," he said.

Mr Sechin said Russia faces stiff competition from Saudi Arabia, which has begun ship oil at cut-throat prices into the Baltic through the Polish port of Gdansk, taking local market share from under the noses of the Russians.
But the 'game changer' is US shale that has displaced Saudi Arabia as the fundamental price-setter for the world. He said the immediate prospects of the global oil industry now depend on whether shale producers have enough hedging contracts to last beyond the end of the year.
Russia is currently the world's largest oil producer, extracting 10.7m barrels a day (bd), but is living off legacy investments. Plans to develop the off-shore fields in the Arctic and the vast shale reserves of the Bazhenov Basin are not viable at current oil prices, and in any case rely on imported technology that is subject to western sanctions.

Mr Putin said the economic crisis has touched bottom and the decision to let the currency slide by 50pc rather than waste reserves defending the exchange rate is starting to bear fruit. "We are seeing the first signs of stabilization, even though some sectors of the economy are still in recession. We are seeing more confidence in manufacturing industries. Things are looking up," he said.

Russian companies have survived being shut out of the global capital markets for most of the last eighteen months and have repaid much of their hard currency debt as it comes due, greatly reducing their vulnerability. Capital is no longer fleeing the country. There were net inflows of $5.3bn in the third quarter, the first positive figures since 2010. "What it shows is that markets are responding very quickly to what is happening in our country", he said.

The International Monetary Fund is less sanguine. It has cut its forecast for Russia yet again, expecting the economy to contract by 3.8pc this year and a further 0.6pc next year.