Russian Economy - 2014 Crisis
In 1998, Russia was hit by a financial crisis that resulted in the Russian government and the Central Bank of Russia devaluing the ruble and defaulting on its debt. The situation in 2014 remained different from the 1998 default, as Russia then had low reserves, a low oil price, a budget deficit and struggled to collect tax revenues.
The value of the ruble, against the US dollar dropped by more than 40 percent in 2014. With the fall in the value of the ruble, inflation in Russia has accelerated, and could hit 9 percent in the coming weeks. The economic ministry estimated that the real incomes of Russians will diminish by 2.8 percent in 2015, instead of the earlier prediction of a gain of four-tenths of a percent.
Russian officials predicted the the economy will shrink by some 2.8 percent in 2015 and the IMF said the prolonged Western sanctions could lead to a 9 percent drop in GDP in Russia in the medium term. The ruble lost about half of its value in 2014 but recovered slightly in 2015 after energy prices stabilized.
The value of the Russian ruble contined to slide in August 2015, hitting lows against the euro and the dollar not seen since early this year. The ruble-euro rate reached more than 70 rubles and fell to 64.4 rubles to the dollar in trading on August 6. The euro rate was the lowest since March and the dollar rate was the weakest since February. The ruble's fall is tied to the Russian economy, which slumped into recession due to lower oil prices and Western sanctions against Moscow because of the Kremlin's involvement in the Ukraine crisis.
In 2015 Russia's economy had its first contraction in nearly six years following a sharp slide in energy prices and the ruble's worst crisis since 1998. Citing preliminary data, the Federal Statistics Service said on 15 May 2015 that gross domestic product declined 1.9 percent in the first quarter year-on-year, following a 0.4 percent gain in the previous three months.
Russia's credit rating was downgraded January 26, 2015, falling below investment grade for the first time in a decade to what the financial world calls “junk status.” The influential Standard & Poor's financial services firm cut Moscow's sovereign credit rating a notch, from BBB minus to BB plus, and said it has a negative outlook on the Russian economy. S&P said Russia's financial problems are likely to worsen.
The Russian ruble, along with other emerging markets' currencies, was hit in early 2014 by the capital exodus generated by the actions of the US Federal Reserve. Exchange rates of Turkish lira, South African rand, Argentinian peso and Brazilian real against the US dollar were rising continuously in the early weeks of the year, sparking concern about a new “emerging market crisis” akin to the one that hit the Asian countries and Russia in 1997-1998. However, Russia may be a special case among the emerging economies because it had a positive commercial balance and a big part of its income was generated in US dollars while most of its expenses were in rubles. From this point of view, Russia resembled China and some economists believed that a weaker ruble was beneficial for the Russian economy just like a weaker yuan was beneficial for the Chinese economy.
Some $63 billion left Russia in 2013 alone, destined for Swiss banks, Caribbean offshore accounts, and luxury real-estate markets in London, Manhattan, and southern France. Russia's Central Bank has estimated that two-thirds of the country's capital outflow were proceeds from crime, bribes, and tax fraud.)
Russia acknowledged for the first time on 07 November 2013 that its economy would lag global growth over the coming two decades, setting the stage for an era of stagnation that could threaten the stability of the regime. Economy Minister Alexei Ulyukayev forecast that Russia's economy would grow at an average rate of 2.5 percent during that period - down from an earlier 4 percent and half the 5 percent rate Putin had targeted before his return to the Kremlin in 2012. The downward revision cast Russia as the poor relation in the BRICS group of large emerging markets that includes Brazil, Russia, India, China and South Africa, with the other BRICS forecast to grow at 5.2 percent during that period. With the Ministry expecting global economic growth to average 3.4-3.5 percent, the outlook made a mockery of Putin's oft-repeated pledge to lift Russia into the world's top-five economies by the end of this decade. And the Ministry's pessimistic forecast was based on an oil price forecast many analysts view as over-optimistic.
With investment falling, Russian economic growth in 2013 was expected to slow to its lowest level since the 2009 financial crisis, a development that has prompted calls for structural reforms. Officials are predicting just 1.8 percent growth in 2013 – down from 3.4 percent in 2012 and 4.3 percent in 2011. Russia’s GDP in the first eight months of the year grew 1.5 percent year-on-year, but seasonally adjusted month-to-month growth was zero, Economic Development Minister Alexei Ulyukayev said 28 September 2013. August turned out to be “worse than July,” he told an international investment forum in the southern Russian city of Sochi. “There are no visible signs of change for the better.” The minister also urged Russians to prepare for a worsening unemployment situation next year due to economic stagnation. The country's economy was gradually but steadily slowing down, a process that had been ongoing since 2011, as the raw materials locomotive was on the verge of a full stop.
The International Monetary Fund said 30 April 2014 that international sanctions imposed on Moscow over the crisis in Ukraine were hurting the economy. The IMF cut its 2014 growth forecast for Russia to 0.2 percent from 1.3 percent and forecast capital outflows of $100 billion this year. The IMF mission chief to Russia, Antonio Spilimbergo, also told reporters that Russia was “experiencing recession” and that a resolution of the Ukraine crisis would significantly reduce Russia's own economic uncertainties.
Russia’s economy was navigating an economic downturn with real GDP growth slowing to an estimated 1.3 percent in 2013 from 3.4 percent of 2012. Russia's economy slowed in the first three months of 2014, as uncertainty over the crisis in Ukraine worried investors. Russia's Economy Minister Alexei Ulyukayev said 15 April 2014 that the economy expanded just 0.8 percent in the first quarter. Earlier predictions said it would grow 2.5 percent. The World Bank predicted the Russian economy could shrink nearly two percent in 2014 if instability in Ukraine continued and Western nations hit Russia with more sanctions.
The lack of more comprehensive structural reforms has led to the erosion in businesses’ and consumers’ confidence, which became the decisive factor for the downward revision of the World Bank’s November growth projections for Russia, says the World Bank’s Russian Economic Report of March 26, 2014. In the past, the lack of comprehensive structural reforms was masked by a growth model based on large investment projects, continued increases in public wages, and transfers – all fueled by sizeable oil revenues.
Birgit Hansl, World Bank Lead Economist and Country Sector Coordinator for Economic Policy in Russia and the main author of the Report, said “The low-risk scenario assumes a limited and short-lived effect of the Crimea crisis and projects 1.1 percent growth for 2014 and 1.3 percent for 2015. The high-risk scenario assumes a more severe shock to economic and investment activities if the geopolitical situation worsens, resulting in a contraction of 1.8 percent in 2014 and 2.1 percent growth in 2015. Also, global risks are expected to remain prominent with continuing higher overall market volatility.”
The World Bank warned that Russia may see capital outflow at $150 bln in 2014 year due to the current standoff with the West over the Crimean crisis. Capital flight from Russia may reach some $100 billion in 2014, a presidential aide said. “I believe that the figure would be around $60-80 billion, but counting interventions [by Central Bank to reduce volatility], it could be some $100 billion,” Andrey Belousov said. According to Central Bank data, net capital outflow from Russia increased from $54.6 bln in 2012 to $62.7 bln in 2013.
Russia's central bank published balance of payments data that showed an estimated $63.7 billion in net capital outflow in the first three months of 2014 - as much as the $63 billion in outflows seen during all of 2013. The surge coincided with slumping investment and a sharp deterioration in business confidence, as forecasters slash economic growth forecasts after Russia's annexation of Crimea and warnings it could intervene further in Ukraine.
In September 2014, for the first time since the 2008-2009 crisis, a one-percent year-on-year decrease in real wages was registered. And according to the Russian Federal State Statistics Service, the first half-year results show that the year-on-year dynamics of retail sales on the whole had fallen from 3.9 to 2.7 percent.
On 10 November 2014 the Central Bank of Russia (CBR) abolished its policy of maintaining a dual currency basket along with systemic interventions used to support daily limits in the ruble’s fluctuations, affording its free floating against other currencies in financial markets. The ruble strengthened significantly on the CBR announcement, adding 3.5% to about 45 rubles per dollar compared to an all-time low of 48 rubles per dollar the previous week.
The Russian central bank tried to avert a repeat of the ruble crash of 1998, which bankrupted the country's financial system, impoverished its citizens and led to a period of political turmoil that ended when Putin took power a year later. The bank had a huge $430 billion cash pile of reserves. But even that has limits, and after spending as much as $2.5 billion a day to prop up the currency in recent weeks it announced that it would halt massive regular interventions.
Previously, the Central Bank would carry out interventions until the ruble rate stabilized. For example, in October 2014, it spent some $29.3 billion to support the national currency, while for nine days since late October 2014 it was selling over $2 billion a day. Hit hard by plunging oil prices and international sanctions, the Russian ruble had lost about a quarter of its value by that time, despite several interventions on the currency market by the Russian Central Bank.
According to a September 2014 World Bank study, by the end of 2014 the Russian economy will have grown by 0.5 percent – despite the standoff with West over Ukraine and the imposition of sanctions by the EU and U.S. This means that Russia will be able to avoid slipping into recession this year. However, future development depends on the decrease or escalation of tensions between Russia and the West. As a result, the World Bank prepared three possible scenarios for the development of the Russian economy. The baseline scenario presumes that GDP would continue to grow in 2015 – if nothing changed – but growth would be minimal, 0.3 percent and 0.4 percent in 2015 and 2016. Next, according to the optimistic scenario, if geopolitical tensions disappear and the sanctions were lifted by the end of 2014, then Russia’s economy may accelerate to 0.9 percent in 2015 and 1.3 percent in 2016. The pessimistic scenario assumed stricter sanctions and, tied to this, a fall in GDP by 0.9 percent in 2015 and 0.4 percent in 2016.
Moscow's economic development ministry said 02 December 2014 it was forecasting the Russian economy will contract eight-tenths of a percent in 2015, down from an earlier projection of a 1.2 percent advance. The economic ministry said that its earlier, more robust prediction assumed that the sanctions imposed by the United States and European countries would be lifted in 2015, but said the new projection assumes "continuing strong geopolitical risks." The forecast saw more "capital flight" from Russia, a drop of $125 billion in investment instead of the earlier $100-billion estimate.
On 15 December 2014 the ruble weakened by more than 5 percent, breaking through the level of 60 to the dollar and 75 to the euro for the first time. The Russian currency dropped by 19 percent in the first two weeks of December alone, and by more than 86 percent since January 2014. If oil prices stay at the $60 level, the central bank said the Russian economy could contract by as much as 4.8 percent in 2015.
The value of the Russian ruble plunged to new lows against the dollar and euro, with Moscow's central bank predicting higher inflation and the national economy tumbling into a recession. The value of the Russian ruble plummeted to new lows 16 December 2014. At one point, the currency plunged to 80 rubles to the dollar and 100 to the euro, before regaining some lost ground in late-day trading on the Moscow Exchange. Moscow's central bank dramatically raised its benchmark interest rate from 10.5 to 17 percent, in hopes of stemming the sell-off of the currency. This biggest interest rate increase in 16 years, an emergency attempt to prop up the rapidly declining currency, had no impact.
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