The Russian Crisis Deja Vu

Topics: Monetary policy, Foreign exchange market, Central bank Pages: 11 (3473 words) Published: March 23, 2015
From Crisis to Crisis….

Bharat Pratap

Russian crisis – Evolution and prognosis

1. Contemporary Episode – Currently ongoing panic catalyzed by falling oil prices, a highly hydrocarbon based economy and lack of diversification and transparency. Key Statistical Highlights :

Source : World Bank & OECD

Source : CRS Compilation of data from IMF & Bank of Russia

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Russian crisis – Evolution and prognosis

Recent History & Current Situation:
Over the last 14 years, Russia was a significant beneficiary of the increasing global energy prices as well as the high level of global commodity prices. This helped Russia overcome the crippling crisis which is suffered in 1998. Additionally the country also suffered in the course of the global financial crisis of 2008-09. Due to sustained hydrocarbon prices the country reversed the slide and bounced back in 2010. However in the last 12 months Russia has been hit hard by a number political and economic of factors. This has led to an outflow of capital, a weakening of the Rouble, high inflation and of late a negative growth environment.

On December 15th, panic began to spread in the market as news of further economic strife gripped the investors, leading to a huge sell-off of the Rouble. This added to the already depreciating currency and to stem this rout, Bank of Russia announced the largest hike interest rates since the 1998 crisis and increasing the rate from 10.5% to 17% over night. On December 16th the Rouble collapsed from an already weak RUB 60/ USD to RUB 80/USD, and this was despite the 6.5% increase in interest rates announced at midnight, further fuelling the panic. This was the culmination of a crisis which had been building for a number of years. The Russian economy has been almost entirely dependent on oil prices. The economy is tightly controlled by a small self-interest group and foreign investors have been treated in an erratic and often unfair manner, which led to the economist publishing a report stating how Russia was trading at a trillion dollar discount. Russian authorities have also been contributing to the ongoing panic by forecasting falls in the economy of around 5% in 2015. Added to this is the possibility of control on capital which is only speeding up the speed of flight of capital, adding pace to the downward spiral. The Rouble depreciation has further led to increase in inflation with the rate if inflation currently at around 11.5% and it’s highest in many years. Russian consumers, fearful of the freely falling Rouble are hurriedly purchasing durable products such as automobiles, which are perceived as a greater store of value. Although the levels of sovereign debt in Russia is at a manageable level ($57 bn), state affiliated corporations tend to be much more leveraged ($570 bn as estimated in the Economist) and an increased interest rate will have a negative consequences for these corporations and hurt Russia’s economic growth. This is underlined by the fact that these quasi-sovereign corporations will need to repay around $130 bn of foreign debt by the end of 2015. The Bank of Russia and most analysts already predict negative growth for Russia in 2015 of between 4-5%. Even prior to the acceleration of the rouble depreciation on 17th December the World Bank provided forecast estimates for growth in Russia with an upper case of $85/bbl, a base case of $78/bl and a lower case of $70/bl. In the best case scenario the Russian economy would be flat in 2015, and in both the base case and lower case the economy would contract. Today we see oil at below $60/bl. This makes it highly likely that should all other things be equal we will most likely see the Russian economy contract by 4-5% in 2015 and should oil not recover in the duration of the Page 3 of 11

Russian crisis – Evolution and prognosis

year to above $80/bl we can see Russia continuing to contract or at best have a period stagnation. This is well explained by...
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