Can Russian Economy Avert Recession?

Russian Ruble collage

Image courtesy of Fotalia

Can Russian Economy Avert Recession?
| published December 30, 2014 |

By Thursday Review staff


A worldwide drop in oil prices may be a wonderful benefit for families in the United States and Canada, but that astounding price decline is having a devastating effect on the already troubled Russian economy.

For months, Americans have reaped the benefits of lower prices as the pump. If the trend continues for 12 months, most economists—along with the U.S. Department of Commerce—estimate that the average U.S. household could save about $1100 per year. Canadians, too, are benefitting from those oil price drops, and retailers all across North American hope to see that savings translated into more retail spending—especially now that a fair-to-middling holiday shopping season appears to have ended.

But there is no joy in the Russian markets, where a difficult combination of inflation, layoffs, and a falling ruble is wrecking the once-vibrant Russian economy. Already coping with heavy sanctions imposed by the U.S. and European Union nations—sanctions which have included currency restrictions, embargoes on certain types of technology and high tech gear, and a variety of product limitations—Russia’s economy is suffering mightily as the market value of oil and gas keeps falling.

The ruble, which has had its worst year since 2009, continues a freefall on world markets. The Russian currency has lost more than 50% of its value in one year, and repeated efforts by Moscow’s Central Bank to halt the slide have failed. The immediate result for average Russians: inflation. As prices in retail stores and supermarkets rise—sometimes overnight—Russian consumers are forced to cope by spending their rubles as quickly as they get paid, buying essentials like groceries and household supplies before the prices of those items can rise the next day.  Economists say that this sort of hyper-inflation is dangerous.

The Central Bank has been selling off its once ample stockpile of foreign currency in an effort to inject life into the ruble, but even this drastic measure has not been enough. Complicating things for the Central Bank and other financial institutions in Russia is the fact that most have been forbidden—under the terms of the sanctions—from exchanges or purchases from overseas banks or from foreign reserves.

Much of the Russian economy is built upon oil, gas, and energy-related industries. When demand for oil began to slip earlier in 2014, it began to put a dent in the health of the Russian economy at a time when sanctions were already having a negative effect. Those sanctions, first imposed by the United States, then, later by the European Union, came as result of Russia’s intervention and military actions in the Crimea and the Ukraine. Harsher sanctions were imposed by many European countries (and other countries around the globe) in the wake of the shooting down of a Malaysian Airlines passenger plane, which was struck by a Russian-made missile over a rural area of eastern Ukraine. And additional sanctions were imposed by the U.S., Britain and other countries—economic punishments directed specifically toward the political and billionaire cronies of Russian President Vladimir Putin. Many of those oligarchs are businessmen who made their fortunes in oil, gas, energy, or related fields—such as pipeline construction or drilling.

The combination of low oil prices and harsh sanctions have also reduced confidence in the Russian economy, inhibiting investment and capital projects, and triggering a decline in almost all forms of production and manufacturing.

This week, amid concerns that the country would sink even more deeply into recession, Prime Minister Dmitry Medvedev announced that he would ask that the government inject nearly $20 billion (about 1 trillion rubles) directly into Russian banks in mid-January. The banks would be expected to use this fresh capital for loans and investment purposes.

Oil prices are at a five-year low, and have experienced the biggest short-term drop in prices seen in decades. There are a variety of explanations for the decline in price: Saudi Arabia is continuing to flood the markets with oil, which has driven down the worldwide price; OPEC countries have been unable to agree upon a starting point to cope with what may be a worldwide decline in demand; demand in the United States has begun to show signs of levelling off and even falling, the result—some have speculated—of a three-way combination of fuel-efficient vehicles and homes, a spike in use of electric and battery powered cars, and a swelling stockpile of crude inventories and oil reserves. There is also a belief that alternative sources of U.S. energy, such as oil shale—extracted through a process called fracking—have shown signs of impacting the markets.

Worldwide, oil prices have fallen 46% in a one year period. Despite pressure from some OPEC nations to cut production, Saudi Arabia and Qatar have ramped-up production. Ministry spokesmen for both countries say that they are confident that demand will increase worldwide with economic growth in 2015, but some oil analysts suspect that Saudi Arabia is seeking to push others from the market.

Putin is seeking long-term solutions to Russia’s drop in demand for its oil and gas, and has proposed a massive joint venture with the Chinese to build thousands of miles of pipeline across Asia, in an effort to connect Russian oil fields and refineries with energy-hungry Chinese industry and business.

Related Thursday Review articles:

Oil Price Drop Hurts Russia; R. Alan Clanton; Thursday Review; December 18, 2014.

Oil Prices May Drop, But Food & Coffee Will Cost More in 2015; Thursday Review; December 28, 2014.