The freefall of oil prices could not have come at a worse time for Russia. Initially, it seemed like healthcare would be spared the price of Putin’s intervention in Ukraine and the annexation of Crimea, which led to international economic sanctions imposed on Russia. Perhaps they could have been, if the sanctions – and Russia’s counter-sanctions – did not coincide with a dramatic fall in oil prices. The two factors occurred almost side-by-side, and lead to a loss of confidence in the Russian economy and a rapid devaluation of the Russian ruble. The result was a full-fledged economic crisis, affecting all aspects of Russian society and daily life.
Nearly half of Russia’s government revenue comes from oil and gas exports, and the 2014 budget was based on oil trading at $100 a barrel. However, in 2014, as a result of an increase in oil production lead by the Organization of Petroleum Exporting Countries (OPEC), oil dropped to $60 a barrel and continued to drop. Since June 2014, crude oil prices have fallen by over 60%. A decline in confidence in the Russian economy lead to a rapid-fire selling of Russian assets and steep currency devaluation – the ruble saw a 37% drop in the average exchange rate in 2015. Either one of the situations – sanctions or oil prices tumbling – would have been enough to trouble a developing, import- and resource-dependent economy like Russia’s, but they were especially lethal together.
What does this mean for healthcare? To start, the 2015 state budget had to be amended to keep up with the plummeting ruble and oil prices. The 2016 state budget, only recently finalized, is a recession-era budget with a number of cuts – including a 5% cute in defense spending, to the shock of Russian citizens and Russia-watchers alike.
Ostensibly, healthcare expenditure grew by 9% in 2016, but in reality, the figure is misleading. The 2015 figure decreased by 8% from the intended target, so a 9% growth over the final number is nothing to celebrate. As percentage of GDP, healthcare expenditure declined from 3.7% to 3.4% - a very low figure compared to European counterparts. To rub salt in the wounds, government ministries were asked to submit plans on how they plan to reduce their spending by a further 10%.
The iconic images of the crisis in the media are those of contraband European cheeses and fruits being destroyed, and cheese-smuggling gangs being jailed. However, consumers and manufacturers are starting to see the shortages on their pharmacy shelves. Acute shortages of many drugs – especially antibiotics and painkillers – of foreign and domestic origin are being reported. The currency devaluation and overall financial crisis has made the production of some drugs completely unprofitable. Drugs on the List of Vital and Essential Drugs (ZHNVLP) have been particularly affected, as these drugs are reimbursed by the government – at a notoriously low rate with a very slim profit margin.
In order to prevent further shrinking of the Essential Drugs market, the Russian government has introduced a number of measures to aid manufacturers, such as subsidies for interest rates on bank loans and subsidies to increase domestic production. As discussed in a previous DRG blogpost, the Russian government has been heavily supporting the nascent domestic drug industry, hoping to achieve pharmaceutical self-sufficiency through import substitution. What was a merely a plan before the economic crisis, has now become a necessity. Foreign manufacturers are certainly facing an uphill battle, and will need to see the crisis as an opportunity to invest in Russian operations while the exchange rate is in their favour.
All is not bleak however, as the Russian government remains committed to healthcare modernization programs – many of which are funded separately from the healthcare budget. Areas like increased high-technology care, maternal health and the development of emergency care saw significant increases in their budgets this year, although some programs – like those focusing on palliative care and hospital staffing – did suffer.
At the time of writing this, OPEC, Russia and others were seemingly coming to an agreement about freezing oil output levels. While this will not help Russia regain lost economic ground and recoup the last few years of GDP decline, it will at least let budget planners assume some stability going forward. Russia’s budget planners are planning for oil to trade at $40 to $60 a barrel for the next few years, with the 2016 budget based on $50 a barrel.
Interestingly, the U.S. Energy Information Agency recently reported that Russia’s own output levels have reached a historic high – in part aided by the low ruble that has hurt many other aspects of the economy, as it has kept production costs down. As such, it is certainly an advantageous time for Russia to agree to an output freeze and could help the recovery of the Russian economy going forward. Machinations in oil production are economically and geopolitically motivated, and relies on unpredictable actors like Iran cooperating for the supposed greater good of all oil-producers.
While oil production game theory plays out globally amongst oil-producing nations, Russian citizens are faced with less theoretical problems at home. However, it seems like the worst of the crisis may be over, and there is some hope for the future. GDP is expected to only decline by 0.6% in 2016, compared to an almost 4% decline in 2015. Recovery could be around the corner, so manufacturers should not yet abandon the Russian market.