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January 2015
Oil price decline and western sanctions push Russia's economy into free fall
The year 2014 was a forgettable one for Russia. The country was engulfed by serious geopolitical and financial problems that started
with the rising political tensions in Ukraine, leading to the imposition of trade sanctions by western countries on Russia. The country
reacted by imposing counter-sanctions, resulting in its isolation and grave financial troubles. Although Russia tried to fight the problems
related to sanctions, inflation, and currency depreciation, the sudden fall in oil prices has dealt a severe blow to its economy. Russias
economy depends heavily on the production and export of hydrocarbons; and, the recent decline in oil prices has made it inevitable for
the USD2tn economy to slip into recession. Although the central bank and the government have intervened to revive the economy, any
favorable impact of the measures taken remains to be seen.
Russia had a gloomy 2014. The country is staring at a GDP growth rate of less than 1.0% for 2014 for the first time since 2010. Anton
Siluanov, Russias Finance Minister, has already warned against a GDP contraction of 4% in 2015 and a budget deficit of over 3% if oil
prices stay at USD60 per barrel. In view of the weak outlook for oil prices and unabated tensions in Ukraine, even the IMF downgraded
Russias growth projection for 2014 and 2015 to 0.2% and 0.5%, respectively.
Russias economic growth declined from 2% in 4Q 2013 to 0.7% in 3Q 2014. The sanctions imposed by western countries, following
the geopolitical tensions in Ukraine, and the declining oil prices have wrecked the countrys economy. Investor confidence in the
country has been eroded by the recent turn of events, which is evident from the data released by Russias central bank, showing net
capital outflows in excess of USD85bn in the first three quarters of 2014 as against total outflows of USD61bn in 2013. Russias
problems have been further compounded by a plunging currency; the value of Russian ruble has declined over 60% against the US
dollar since the beginning of 2014.
(y oy change)
(USD bn)
60
4%
40
2%
20
0%
-2%
(20)
-4%
(40)
-6%
(60)
1Q
2Q
3Q
4Q
2010
1Q
2Q
3Q
4Q
1Q
2Q
2011
3Q
4Q
1Q
2012
GDP (LHS)
2Q
3Q
2013
4Q
1Q
2Q
3Q
2014
Source: Bloomberg, IMF, World Bank, Central Bank of Russia, Government estimates
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of Russias banking assets, were severed from the US and European Unions financing systems, resulting in a credit crunch. Presently,
Russian companies are finding it difficult to borrow money to even finance their own operations. In fact, the Finance Minister expects
that if the sanctions are extended and continue throughout the next year, Russia could stand to lose about USD40bn (about 1.9% of its
GDP) in economic activity.
Oil price plunge not only eats into reserves but also brings economy to a standstill
The sharp fall in the oil prices over the past few months has dealt a severe blow to the Russian economy, already reeling under the
effect of sanctions. In September 2014, the Finance Minister stated that in addition to losing USD40bn a year due to the economic
sanctions, the country would lose another USD90100bn due to the ~30% drop in the oil prices since the beginning of the year. With oil
prices having witnessed a decline of ~48% in 2014, we expect the impact on the economy to be even greater.
The Finance Minister has already issued a warning about GDP contraction in 2015 and a swelling budget deficit if oil prices remain at
around USD60 per barrel. Plummeting oil prices have sharply dragged down Russias energy exports, which form nearly 67% of the
total exports and around 15% of the GDP. The current commodity scenario is likely to propel Russian policymakers to seriously rethink
budget strategies as the current budget had reckoned the price of oil to remain around USD100 per barrel of oil, with taxes on oil
contributing nearly 50% to the total fiscal receipts. According to Tatyana Nesterenko, Russias first Deputy Finance Minister, the
continued decline in oil prices is likely to considerably eat into the USD74bn reserve fund created by the government to sustain energy
price fluctuations.
Others
20%
Crude oil
33%
Fertilizers &
chemicals
2%
Others
32%
Machinery
49%
Machinery
5%
USD 314.9bn
USD 527.3bn
Metals
6%
Energy
1%
Clothing
3%
Gas
13%
Oil Products
21%
Medicines
Food
4%
5%
Automobiles
6%
Source: Bloomberg
The turn of events has unearthed a structural weakness in Russias economy, stemming from the over-dependence on hydrocarbons.
The debt crisis of 1998, when oil prices plunged to USD10 per barrel, seems to have returned to haunt them. Back then, large fiscal
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deficits and low foreign reserves had forced Russia to default on the dollar-denominated public and private debt. Further, the country
suffered from hyper-inflation, which led to a lot of wealth being wiped out.
(Indexed = 100)
(y-o-y change)
12%
100
10%
80
8%
60
6%
40
4%
20
2%
0%
Jan Feb Mar Apr May Jun
Oil price
Jul
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from 7% in March 2014 to 10.5% in December 2014. Also, on December 15, the central bank hiked the interest rate to 17% from
10.5%, which is the largest increase since the economic crisis of 1998. However, these interventions are yet to show any substantial
results. On a separate note, President Vladimir Putin has passed a new law to double the deposit guarantee for deposits in bank
accounts to USD25,370 in order to protect the interests of common citizens. Steps are also being taken to recapitalize local banks if
they face any financial crisis.
(USD bn)
17%
550
16%
500
12%
450
419
8%
400
4%
350
300
0%
2010
2011
2012
2013
1Q
2Q
3Q
4Q*
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014
Source: Bloomberg
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