Economic sanctions, falling crude oil prices, and now inflation are putting the squeeze on Russia as its ruble plummets. The Russian economy is facing increasing hardships brought on by crude oil prices in freefall and Western sanctions that continue to tighten imposed over Russia’s annexation of Crimea and ongoing disruption in Ukraine. The Kremlin failed to variegate the economy during the fat years and is now facing the daunting task of exacting a hard economic restructuring.
The Russian ruble started off trading at just over 30 to the U.S. dollar this year. It is now hovering around 67 to the U.S. dollar as inflation continues. It is in step with the global decrease in the price of petroleum which fell from $115 per barrel to just $62 as of last week. The rising price of imports including clothing, food, and other daily items has inflation spiraling out of control. Moscow’s stock market is falling and reportedly capital flight is on pace to break records.
Generally when a country’s currency declines, it opens up the opportunity for locally produced goods to be sold to foreign buyers at a cheaper price. That is not the case for Russia since the country has few export industries outside of oil and arms that is competitive. Sanctions imposed by the West have squeezed Russian banks and businesses out of borrowing cash abroad. Most of the banks and businesses are now being forced to pay dollar-denominated loans back without the opportunity of taking out new loans. Russia is charted to go into recession by early 2015 according to economists.
Despite the economic stranglehold and the danger of inflation, Russian president Vladimir Putin is still highly favored according to recent polls. Putin’s popularity in spite of recent events remains over 80 percent. The Russian populous has stood in agreement with Putin’s annexation of Crimea back in March and supporting rebels in east Ukraine.
Russia is no stranger to economic hardship. Russians have seen multiple crashes of the economy back in the 1990s and experienced the deep recession after the Wall Street collapse back in 2008. The Kremlin, molded by past economic crises, shows no sign of panic or protest.
However, it is not all doom and gloom for Russia with the right restructuring. The Kremlin can combat the plummeting Russian ruble and the squeeze of inflation with a few key moves. Moscow still maintains the world’s sixth-largest foreign currency reserves estimated around $400 billion. The reserves could provide some cushion from future financial hardship. Russia’s Central Bank reportedly stopped using its dollars to hold up the ruble. This indicates that the Central Bank still has resources to bail out the Russian banks.
Russia’s stagnant manufacturing and agricultural sectors show signs of picking up and have begun replacing imported goods that have been sanctioned or priced out of Russian markets. Expectedly, the Russian arms trade is still booming. Putin has raised morale by increasing talks with new prospects such as Turkey, India, and China. One upside to the plunging ruble is now the government has an overflowing budget. Half of its revenue is generated in American dollars through petroleum and spends money using the local currency.
The Bank of Russia’s Board of Directors raised key interest rates effective Dec. 16 to offset the inflation risks. With the existing sanctions on Russian companies, the domestic foreign exchange market has shown a demand for foreign currency. This in turn led to the devaluation of the Russian ruble against the U.S. dollar. In order to stabilize the foreign exchange market, the Bank of Russia implemented certain measures offering refinancing in foreign currency and taking a conservative approach towards banking sector liquidity management. While inflation and the plummeting ruble is a cause for concern for President Putin, Russia is no stranger to the squeeze and as history shows over the last decade, Putin’s shrewdness will revive the economy.
By Stevenson Benoit
Photo by Dennis Jarvis – Flickr License