According to the Federal Statistics Service, Russia’s GDP for 2015 was -3.7%. This is the lowest level of growth for the former Soviet Union since 2009 when plummeting oil prices, political fears over a war with Georgia and contagion from the U.S. financial crisis catapulted the country into a recession. The root causes of Russia’s current economic woes include the plunge in oil prices, a weak ruble (the currency has lost more than 7% against the dollar this year) and sanctions imposed on the motherland by the U.S. and the European Union.
As the Russian economy slumps for the second time in seven years under President Vladimir Putin’s leadership, what lies in wait for the Federation's economy, how will its people react and what will Putin do?
Russian Economic Forecasting: Oil
Russia is the world’s largest exporter of oil and gas condensate: the country averaged 10.83 million barrels a day in December, 2015. This urge to export oil combined with a Brent crude oil benchmark of approximately $30 a barrel (its lowest level since 2003), means that the country is now facing an approximate $40 billion shortfall in its Federal budget and will have to cut expenses by 10% according to the New York Times. And no respite is barreling over the near-term horizon as according to several banks, analysts and industry executives stated in a Wall Street Journal article, that the expected oil glut is expected to last until 2017. (For more, see: How Bad Will It Get for Russia in 2016?)
The Ruble and the Russian Consumer
The ruble was ranked as the worst performing currency among 24 emerging-market currencies for 2015 according to Bloomberg. On a macro level, when a country’s currency weakens, it is typically a positive event as exports theoretically increase due to cheaper goods, leading to stronger growth in the country. But Russia is an exporter of energy: in 2013 energy exports for the country represented $336 billion of its total exports of $507 billion or 66% according to The Observatory of Economic Complexity. Given that oil is pegged to a global benchmark which is beneath 10-year-lows, Russian exports are anemic.
What is happening is that Russian consumers are being pinched by the weakened ruble: Russia is a major importer of quintessential consumer goods such as cars, pharmaceuticals, vehicle parts and computers which collectively represented 15% of the country’s total imports of $324 billion in 2013 according to data from The Observatory of Economic Complexity. As the ruble weakens, Russian consumers can afford less and less of the imports manufactured using stronger, foreign currencies and the results are festering up: December retail sales in Russia dropped by 15.3% compared to the same month from a year earlier, wages adjusted for inflation dipped by 10% and rampant inflation stood at 12.9% according to Bloomberg.com. (For more, see: 3 Economic Challenges Russia Faces in 2016.)
Sanctions Over Crimea
The U.S. and the EU imparted the following sanctions on Russia starting in 2014 over its militant “annexation” of Crimea in the Ukraine. Note: this is not a complete list of sanctions but some of the most pertinent ones, all obtained from the European Union Newsroom:
The EU asset freezes and visa bans of some 149 individuals and 37 entities.
A ban on imports going to the EU from Crimea.
The prevention of new bond sales or equity financing of five major, state-owned banks, three Russian energy companies, and three Russian defense companies.
These measures were not designed to cripple the Russian economy as many other nations are intricately linked with the former Soviet Union and depend on its energy exports, but they do serve as a warning shot across the bow to dissuade Russia from a repeat of Crimea. These sanctions nonetheless have stifled the Russian economy as a result of actions directed by Putin.
What Will Putin Do?
This brings us to Putin and what he will do. Will the Russian President invoke a grand act of bullying and take further, militant action against the Ukraine or perhaps restart a nuclear cold war with the U.S. in an attempt to rev up his country’s economy and cling to power? Not likely, although I certainly believe further fits of strong-handedness involving military actions are in the cards when it comes to Putin. Economically, though, the government may attempt stimulus measures which include coming to the table to resolve the Crimea situation to lift sanctions.
The Bottom Line
Ultimately, the Russian economy is reeling in part because of the actions Putin has taken. These economic impacts are filtering down to the Russian populace, and they are suffering as a result. What this could lead to is a political change via the country's 2018 elections, and I do believe the Russian people will voice their opinion.
