2008-2009 Financial Crisis
The Russian economy was impacted by the global economic slowdown and the 2008-2009 financial crisis but quickly rebounded thanks to high energy prices and use of two sovereign wealth funds to inject capital into domestic markets. Russia’s GDP growth forecast of 3.6 percent in 2013 is a healthy figure when compared to the expected continuation of economic contraction in Europe, slow growth in the United States, and deceleration in China. However, Russia continues to be particularly vulnerable to global energy prices and continued weakness in the European economy, as the EU represents more than 50 percent of Russia’s total trade volume.
The global economic crisis hit Russia particularly hard, as the economy remains heavily dependent on commodities exports (primarily oil and gas) for growth, and on foreign capital for investment. The abrupt drop in the price of oil combined with a decline in foreign investment strained the Russian economy, beginning in mid-2008. Throughout the following twelve-month period, Russian industrial production plummeted, with double-digit declines in month-on-month production occurring on a regular basis. Key sectors such as steel and automobiles were hit particularly hard, with Russian domestic automobile production declining by over 50% in the first half of 2009. The industrial sector, particularly the single-company towns, was hard hit, with unemployment remaining at an unprecedented high.
The international financial crisis replaced the war with Georgia as the defining issue for Russia's political class and public, with the "real economy" taking a hit. The precipitous drop in oil, gas and other commodity prices, as well as the withdrawal of massive amounts of foreign investment, exposed the weaknesses in the Russian economy. Prior to August 2008, the Russian economy had been growing fast, with real economic growth of over 8 percent in 2007, a strong ruble, and record levels of foreign direct investment--$41 billion in 2007 alone. Years of budget surpluses and rising oil prices had lifted the country's foreign currency reserves to almost $600 billion, third highest in the world. August marked a clear turning point, when the stock market began to drop sharply, in response to hostilities with Georgia, slipping oil prices, and GOR statements intimating state interference in the economy. Money began to flow out of the country as investors sold their shares and Russians sold their rubles for dollars. By mid-September 2008, the default by a pair of high-profile banks virtually froze lending activity, sending the stock market into meltdown.
Since August 2008 the ruble lost almost half of its value against the dollar. Given this sharp decline, it was certain that U.S. exports will continue the downward trend during the first half of 2009. The dramatic deterioration of the ruble which occurred in December and January will begin to be felt by the consumer in February as retail prices adjust to reflect the increased costs associated with imported inventory and increased liquidity costs. The ruble dollar exchange rate in the beginning of August was 24:1, in the beginning of December 27:1 and in the beginning of February 36:1.
The Central Bank of Russia responded by pumping liquidity into Russian banks, which helped avert a banking crisis. At the same time, the government attempted a managed devaluation, which successfully avoided a run on the ruble and bank deposits but at the cost of a steep decline in foreign exchange reserves to $387 billion by mid-February 2009. This in turn prompted the S&P and Fitch rating agencies to downgrade Russia’s sovereign debt to the lowest investment grade. By 2010, however, the Russian economy had begun a modest recovery, bolstered by government anti-crisis policies, the global rebound, and a rise in oil prices. Russia’s leaders put renewed emphasis on promoting innovation as key to economic modernization as well as on the need to diversify the economy away from oil and gas.
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