Following yesterday’s blog on Brazil, today’s instalment is the second in Key Note’s five-blog series on the BRICS economies, this time focusing on Russia, where boom years seem a distant memory. Sanctions over Ukraine have hit hard. Few countries will export the machinery Russia needs for its oil and gas industry, a major driver of economic growth. Meanwhile, assets in foreign banks have been frozen, travel bans implemented, and key Russian firms including its largest bank and Gazprom, the world’s largest gas extractor, have been blacklisted.

Europeans found themselves uncomfortably exposed by their dependence on Russian gas to keep the lights on as the Ukrainian crisis unfolded. Many have now slashed imports as a result. Latvia, for example, was previously almost entirely dependent on Russian gas; now, it has a new liquid natural gas (LNG) terminal. With the US getting ready to liquefy and ship its shale gas excess — and many other countries already shipping LNG — this has essentially been Latvia’s

Hydrocarbon revenue accounts for 70% of Russian exports and over half of government funding, so a reduction in exports to Europe, a key market, has hurt. Russia has looked east to the People’s Republic of China (PRC) to replace its increasingly hostile European customers, but proposed new pipelines from Siberia will take years to build. Not only this, but rumours swirl that Beijing has forced concessions off the back of Russia’s current vulnerable position, regarding prices and the proportion of the bill that will land in Moscow’s lap.

Of course, you cannot mention hydrocarbons without discussing the Siberian woolly mammoth in the room: plunging oil and gas prices. A shale boom has turned the US into a key swing producer and slashed its insatiable thirst for imported oil; the country is also increasingly extracting gas. Members of OPEC, with their noses out of joint by America’s frackers and Canada’s oil sand producers, have not reduced production despite the recent supply increase, in order to force down prices and place increasing cost pressures on upstart frackers. But the shale industry has proved incredibly resilient at increasing efficiency and cutting costs, undoubtedly to OPEC’s chagrin.

Saudi Arabia, OPEC’s most influential member, pumped a record-breaking 10.6 million barrels per day in June 2015. Meanwhile, Iranian oilfields could soon flood the global market with a viscous black tide as sanctions are lifted following successful nuclear programme negotiations. This would see prices fall further and spell further trouble for Russia, especially as demand for the black stuff continues to ease on a slowing global economy.

Sanctions and plunging oil prices saw Russia’s rouble collapse last year — with it sank consumer confidence and business investment. The only things on the up are inflation and capital flight: inflation because Russia imports many goods (a weaker currency buys less on the global markets, pushing up prices) and capital flight because investors are spooked. Not only did the hike in interest rates to 17% fail to totally turn off the tap of capital outflow despite banks offering tempting rates to keep roubles in Russian accounts, but it was painful to Russia’s many debtors.

The almost unbroken run of oil-backed, consumption-based growth Russia has enjoyed since its 1998 default now seems no more. The weak rouble has left many corporations with dollar-denominated debt in trouble — some of which are state corporations and national energy giants, giving their debts implicit state backing. Russian firms have $500bn in external debt outstanding; $130bn is due before 2015 ends. Repaying these debts in roubles is now very difficult, and few Western banks are willing (or able, due to sanctions) to risk further exposure to Russia’s economy.

Russia did squirrel away a rainy-day nest egg during its boom, but its sovereign wealth fund, though substantial, has grown little since 2011. Spare cash has been diverted to military expansion or boosting wages to help the population. More recently, chunks have been spent defending the rouble.

Despite everything, Russia remains resilient. Oil price recovery has helped, as has deepening its friendship with old ally the PRC. Some foreign investors are beginning to question if Russia’s economy and currency fell too far, too fast and are engaging in a cautious, trickling return, snapping up assets while they’re cheap. Recognising improving conditions, Russia’s central bank has downgraded from red alert; interest rates are now at 11.5%, only marginally higher than they were before the crisis began. Inflation also fell by over a percentage point between March and May 2015.

Despite this, threats to Russia’s all-important hydrocarbon exports remain, with Iran ramping up oil exports, a continued LNG boom and the surprising resilience of US frackers. Sanctions will also remain in place until the Ukrainian crisis is resolved and may even deepen — Western leaders have discussed excluding Russian banks from the SWIFT network, the international banking community’s standard line of communication, which would deal a crippling blow.

Russian corporations are still encumbered by concrete boots of foreign-denominated debt that they must repay or refinance before the end of the year; the same again and more is due by the end of 2016. If the state steps in, Russia’s foreign exchange reserves will dwindle fast. Consumers are also struggling to repay boom year borrowings; figures released in July from the Russian central bank indicated some 8 million retail loans and mortgages were at least 3 months in arrears. These debts — worth around 1 trillion roubles, or a tenth of all outstanding loans — are unlikely to ever be recovered by banks. The threat of defaults looms.

In terms of consumption growth, affluent Russians won’t be helping out — spooked by the recent crisis, they are buying dollars and stashing them in safety deposit boxes or sending capital overseas. Middle-class consumers will find it tough to return to the pre-crisis spending levels that drove the economy; inflation is still high and the rouble still weak.

Russia continues to nurse its wounds, but the path ahead involves many more pitfalls that could yet leave it more bruised than it is today.