RUSSIAN FEDERATION

Impact of exogenous shocks on natural resource driven

economies
Analysis from 2008 to 2014
Russia (2014)

• Surface area: 17,098,242 km² (1st)

• Population: 143,8 millions (9th)

• GDP (US$): 1.861 trillions (6th)

• GDP per capita (US$): 12,925

• Gini: 0.42 (83rd)

• Currency: Russian Ruble (RUB)

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History
• Perestroika (1988-91)
• Gorbachev first modest steps to reform (allowing private-sector
activity)

• “Katastroika” (1991-1998)
• Yeltsin’s radical reforms to introduce a market economy
• 90% of price controls lifted
• 70% of economy transferred to private ownership

• Vast wealth transfer to oligarchs

• 30% of population below poverty line
• Real wage decrease by 38%
• Life expectancy halved while crime rates doubled

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History II
• Since Putin’s access to power in 1999 Russia’s GDP has
doubled
• Population below poverty line decreased from 35% to
11% (2003-2013)
• Living standards of average Russian doubled

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Economy: Natural resources
• Natural resources contribute 19% to GDP
• Value of sub-soil wealth: $75 trillion (Largest on earth)
• Federal budget revenues from energy sector: 50%

Russian exports 2013 in %

4%

Oil & Gas

17%
Metals & precious
metals
11% Manufactured goods
68%
Other

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Economy: Geography

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Economy: Structural flaws
• State ownership made comeback under Putin (50% of
GDP in 2012)

• SME’s account for only 20% of GDP and employment

• Global rankings:
• Index of Economic Freedom 2015: 143rd of 178 (OECD)
• Doing Business 2013: 62nd of 185 (WB)
• Corruption Perception Index 2014: 136 of 175 (Transparency INT.)

• Cost of corruption estimated at 50% of GDP (!)

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Economy: Productivity

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 Economy: Inequality

• Growing inequality
• Top 10% control 84% of total household wealth (Credit Suisse)
• 110 Russians control 35% of total household wealth (Credit Suisse)
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Economy: Lack of innovation
• Russia’s scientific publications are 4% of the US’

• High technology exports 8,3% compared to EU’s 15,3%

R&D spending as % of GDP in 2011 International patents in 2012

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Shock 1: Ukraine crisis
• Nov. 2013: Yanukovych suspended implementation of an
association agreement with the European Union
• 21 Feb. 2014: Month of protests led to Yanukovych
fleeing the country and Russophone regions in East and
South to revolt
• 26 Feb 2014: “Pro-russian gunmen” take over Crimea
• Mar. 2014: War in Donbass region

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Shock 1: Ukraine crisis II
• International community decided an array of sanctions to
hit the Russian economy:
• Asset freezing against high-profile businessmen & government
officials
• Sanctions against Russia’s financial sector
• Sanctions against Russia’s defense & aerospace sectors
• Bans of exports of oil industry technology

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Shock 2: Drop in oil price
• Slight drop in demand due
to weak economies (EU,
China, etc.)
• OPEC not reducing output
• Output increase by Russia
despite sanctions
• Output increase in US due to
shale oil expansion

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Inflation

• Inflation rise is continued after the shocks

• Why?

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Exchange rate plummets
• Ruble loses 46% of its
value vs. US Dollar
• Correlation with dramatic
decrease in oil price
• Loss of confidence in the
ruble due to sanctions
• Massive capital outflows
• Dollarization of savings

Increase in prices of imports… Countermeasures?

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Countermeasures
• Restrictive monetary policy
• Quick increase of interest
rate
•Emergency lending
facilities for banks
• Only partially effective
because causes were non-
monetary

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Fiscal countermeasures
• Recapitalization of unstable banking system (RUB 1 trillion or 1,4%
of GDP)
• Ban on imports of food from western countries (food inflation at
20%)
• Infrastructure projects for RUB 900 billion or 1,2% of GDP

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Real GDP growth

• Real GDP growth decreased from 1,3% in 2013 to 0,6% in 2014

• Shocks do not seem to have affected GDP too much
• Why?

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Trade
Growth in Imports/Exports % of GDP
30

20

10

-10

-20

-30

-40
2008 2009 2010 2011 2012 2013 2014

Imports Exports

• Government banned food imports from western countries

• Decrease in imports was larger than decrease in exports

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Current Account Balance
• Slight improvement in
CA balance
• Goods more than make
up for outflows in every
other account type
• Investments income
outflow dropped because
of sanctions
• Suitable long-term
situation?

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Unemployment
9
8
7
6
5 AVG BIC

4 AVG G7
RUSSIA
3
2
1
0
2008 2009 2010 2011 2012 2013 2014

• Unemployment actually dropped further

• Structural feature of Russia’s labour market: quick adjustment of
wages
• Consumption suffered due to loss of purchase power

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Government budget
Government Surplus/deficit in % of GDP
6 5

4
2
2
0
0 -1 -1
08 09 10 11 12 13 14
-2 -3
-4
-6
-6

-8

• 50% of budget depending on energy

revenues
• Government budget does not give the full
picture of the damage done to the state
• Sovereign wealth fund dropped by 0,1% GDP
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Government debt
Debt-to-GDP ratio in %
140
115 117 118
120 107 111
101
100 89

80 AVG BIC
56 58 56 55 56 56 57
60 AVG G7
RUSSIA
40
14 18
20 11 11 12 13
8

0
2008 2009 2010 2011 2012 2013 2014

• Increase in 2014
• Low levels of debt
• Debt does not seem to pose a long term problem

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Investment
FDI inflows in % of GDP
5%

4%

3%

2%

1%

0%
2008 2009 2010 2011 2012 2013 2014

• Sharp decline in 2014 of FDI (59% from 2013 to 2014)

• Crucial for the natural resources since most of the technology comes
from abroad
• Effect of sanctions

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Long-term effects?
• Natural resource prices are fixed for longer periods of time
• Effect of import bans and ruble depreciation will become more
severe:
• Continuous rise in inflation
• Loss of purchase power
• Drop in investor confidence (crucial for investment in natural
resources)
• No access to external finance due to sanctions
• Shaking banking sector
• Political tensions due to loss in welfare and lifestyle?

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Conclusion

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