FINNACLE 2015 SDMIMD

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 ways-

Russias 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-fund-

to-arrest-ruble-drop.html

http://www.economist.com/news/leaders/21633813-it-closer-crisis-west-or-vladimir-putin-

realise-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-world-

economy/

http://www.forbes.com/sites/lorenthompson/2015/01/02/why-putins-russia-is-the-biggest-

threat-to-america-in-2015/

http://www.theguardian.com/business/2014/dec/17/russias-economic-crisis-five-key-charts