RUSSIAN ECONOMY

Quick Facts
INDICATORS

FIGURES

GDP

2097 USD BILLION

GDP(Per Capita)

6923 USD

GDP Growth Rate

0.04 percent

Unemployment Rate

5.2 percent

Inflation Rate

11.4 percent

Interest Rate

17 percent

Industrial Production

-0.4 percent

Capital flows

-9408 USD MILLION

Currency

63.86

Source: Tradingeconomics.com

Current Situation
Russias economy is teetering on the verge of recession. The central bank expects the next
two years to bring no growth. Inflation is on the rise. The rouble has lost 30% of its value
since the start of the year, and with it the faith of the countrys businessmen. Banks have been
cut off from Western capital markets, and the price of oilRussias most important export
commodityhas fallen hard. Consumption, the main driver of growth in the previous decade,
is slumping. Money and people are leaving the country.

Major Problems
Western Sanctions: It hit the economy through three channels:
(1) Increased volatility on the exchange rate market and a significant depreciation of the
national currency
(2) Limited access to international financial markets for banks and non-financial
corporations, and
(3) Suppressed business and consumer confidence about future growth prospects.

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Falling Oil Prices: The fall in oil prices to below $50 a barrel will cost the state budget,
which was calculated on the basis of $100 a barrel, 3 trillion roubles ($45 billion), or 20% of
planned revenues.
Weak Institutions: At the heart of Russias malaise is the weakening of market forces and
suppression of competition, which means there is no longer much of a market economy. The
expansion of the state means that, although Russia no longer has Gosplan, its economy is
dominated by state or quasi-state firms whose revenues depend not on their economic
efficiency but on political contacts. Skewed incentives as well as corruption and a lack of
property rights have forced the most efficient companies out of the market, strengthening the
position of parasitic and badly managed state firms. Falling oil prices have revealed these
defects, not caused them.
Falling Rouble and Capital Flight: The rouble has fallen by 23% in three months. Russians
have lost faith in the currency and are starting to withdraw deposits. Whatever liquidity the
Central Bank supplies to Russian banks, the money finds its way into the foreign-currency
market, putting more pressure on the rouble.
Unemployment and Inflation: The Moscow construction sector has seen 100,000 people
being laid off. Russias inflation rate is above 9%. Consumer price inflation increased to
9.1% in November from 8.3% in October. The price of oil, Russias main export, has
plunged, while the weak rouble has pushed the cost of imports up.

Impact of Weak Rouble

- Russia imports a great dealthe total value of imported goods, $45 billion in 2000, was
$341 billion in 2013and so a devalued rouble quickly stokes inflation.
- A weak rouble also makes servicing foreign debt more expensive. Russias sovereign debt
is just $57 billion, but its corporate debt is ten times as high. Some of it has been racked up
by state corporations and national energy companies, which gives it a quasi-sovereign status.
And by the end of 2015 Russian firms will have to repay about $130 billion of foreign debt.

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Steps Taken By Russia

Utilizing Reserves

Russia accumulated more than $500 billion in reserves, including around $160 billion in two
reserve funds which is now being used in difficult times to protect the rouble and the
economy. Russia has recently unseal its $88 billion Reserve Fund and use it to acquire rubles.

Raising Interest rates

Policy makers have raised interest rates by the most since 1998. Russias central bank raised
interest rates to 17.5% on 16 December, from 10.5%. and also introduced a 1 trillion-ruble
($15 billion) bank recapitalization plan.

Cut on Public Spendings and Import Restrictions

Restriction on food imports for preserving currency reserves and stimulating farms. There has
also been cut in health sector reforms and other social benefits. It also asked exporters to sell
foreign currency revenues while also warning large firms not to buy it.

What the Future Holds?

Reserve funds may be depleted
With social spending representing a third of the overall budget and military expenditure at 35
per cent, Russia is poised to exhaust its two reserve funds in 18 months if oil prices stay at
around current levels of $50 a barrel.
Trickledown effect
The devaluation of the ruble has already led to a sharp rise in the cost of imports and an
immediate drop in living standards. Also, the Central Bank's decision to raise the key interest
rate guarantees that, unless a miracle occurs on the world oil market, Russia will experience a
serious decline in industry and all other sectors of the economy, and measures aimed at
preventing a run on the banks will only cause new losses for the banking sector.
Contraction in GDP
GDP is now expected to contract by between 3% and 5% this year. Russia's credit rating is
moving inexorably towards junk.

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Impact on World Economy

Despite the fact Russia accounts for 3% of global GDP, as per theguardian.com, Russian
crisis can spread in 5 waysRussias immediate problems have been caused by the sharp drop in the price of crude and it
is not the only one to be suffering. Venezuela and Iran are finding it hard to cope with oil
down at $70 a barrel. If Russia goes, it will be a case of: whos next?
Second, Russia still has close economic links with eastern Europe, so a collapse would have
serious consequences for countries such as Poland and an already imploding Ukraine.
Western Europe, too, would be affected if for any reason gas supplies through Russias
pipeline were cut off.
Third, confidence would be hit. Germanys weak economic performance since the spring can,
in part, be attributed to the gloomier economic mood. The slowdown in the rest of the
eurozone has probably had a bigger impact on German activity but the tension between
Moscow and Kiev has certainly not helped. Russia might be enough to tip Germany into
recession, which in turn would be enough to ensure that the European Central Bank began a
quantitative easing programme.
Fourth, nobody is quite sure how Vladimir Putin, pictured, would respond to the most
challenging economic circumstances since 1998. Any confidence effects from an economic
crisis would be exacerbated by the knowledge that Russia is controlled by a president able to
make felt his countrys still considerable geo-political and military clout.
Finally, the assumption is that financial market exposure to Russia is relatively limited given
that overseas banks had $209bn (134bn) of loans to Russia when sanctions were imposed in
March. On the face of it, western investors do not look all that vulnerable and have had time
to get their money out. But that was also the assumption in 1998, when Barclays had to set
aside 250m to cover its Russian losses. Financial trades are now so complex and leveraged,
it is impossible to know for sure how big losses might be this time.
Also Exports to Russia are important to Europe. Exports equal 27 percent of the European
economy and exports to Russia equal 6.9 percent of Europe's exports. In turn, exports to
Europe are important to the U.S. U.S. exports to Europe equal 17.5 percent of U.S. exports.

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Bibliography
http://www.bloomberg.com/news/2015-01-14/russia-to-convert-currency-from-wealth-fundto-arrest-ruble-drop.html
http://www.economist.com/news/leaders/21633813-it-closer-crisis-west-or-vladimir-putinrealise-wounded-economy?zid=295&ah=0bca374e65f2354d553956ea65f756e0
http://www.cnbc.com/id/102282076#.
http://www.bruegel.org/nc/blog/detail/article/1299-could-russias-troubles-affect-the-worldeconomy/
http://www.forbes.com/sites/lorenthompson/2015/01/02/why-putins-russia-is-the-biggestthreat-to-america-in-2015/
http://www.theguardian.com/business/2014/dec/17/russias-economic-crisis-five-key-charts

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