How Plunging Oil Prices Are Wreaking Havoc In Russia
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Transcript of How Plunging Oil Prices Are Wreaking Havoc In Russia
RUSSIA’S GREAT DEPRESSION
PLUNGING OIL PRICES are pushing Russia’s economy past the point of no return
Russia is in deep trouble.
So deep, in fact, that it
could be headed for
an economic depression.
The source of its problems can
be traced to the price of oil.
Since the middle of last year,
oil prices have dropped by a
staggering 54%.
$40
$60
$80
$100
$120
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15
Price Per Barrel of Crude Oil (Dated Brent)
This trend follows OPEC’s
attempt to bankrupt new, but
more expensive, sources of oil
in the U.S. and elsewhere.
But Russia has been hurt more
than most because a huge
portion of its economy relies
on energy exports.
In 2013, for instance, Russian
exports totaled $526 billion.
$305 billion of which related
to oil and other types of fuel.
Oil/Energy
$305B
Other
$221B
Russia's Exports
For Russia to avoid economic
contraction, oil must stay above
$90 a barrel.
Thus, not surprisingly, the plunge
in prices is having a brutal
impact on Russia’s economy.
Most critically, the value of
its currency, the Ruble, has
tumbled.
At the beginning of 2014, 34
rubles bought one U.S. dollar.
Today it takes 58 rubles!
0
10
20
30
40
50
60
70
2010 2011 2012 2013 2014 2015
U.S. Dollar to Russian Ruble Exchange Rate
As a result, import prices
have effectively doubled.
And if Russia can’t import
products at reasonable prices,
then its standard of living will
drop precipitously.
One commentator is even
predicting that Russia’s GDP
could fall by as much as 10%
this year!
By comparison, U.S. GDP fell
only 2.8% in the worst year of
the financial crisis.
But perhaps most troublesome
is the impact on Russia’s banks.
To slow the sale of rubles,
Russia’s Central Bank hiked its
benchmark interest rate from
10% all the way up to 17%.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan.
Russia's Benchmark Interest Rate: Apr. 2014 – Jan. 2015
The move, which inversely
impacts bond prices and bank
profitability, triggered the failure
of Trust Bank, a mid-sized lender
based in Moscow.
This may not seem like a big
deal, but we’ve learned over
the years that one bank failure
often begets others.
As Walter Bagehot wrote in his
seminal treatise on banking: "In
wild periods of alarm, one failure
makes many.”
The question, in turn, is whether
or not Russia can maneuver
around these pitfalls.
If it can, then it may be able
to avoid a deep depression.
But if it can’t, then we may soon
be witness to the first Great
Depression of the 21st century.
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