Analyzing Russian Financial Crisis
The period of 2014-15 turned out to be unexpectedly “Black Year” for the Russian economy. In the beginning of the second half of 2014, there was a huge financial crisis in Russia as there was a sharp devaluation of the Russian ruble. The investors were led to sell off their Russian assets as the sign of the declining Russian economy was bifurcated. This in turn led to the declination in the value of the Russian ruble and sparked the fears of Russian financial crisis. This financial crisis affected both the consumers and the producers or the companies and the regional financial markets.
The dearth of confidence in the Russian economy originated from two major sources. The first is the fall in the prices of oil in 2014. The decline in the price of crude oil, a major export of Russia was by nearly 50% between its yearly high in 2014 and December 16, 2014. The second was the sanction imposed by the administration on the Russian government. The Russian stock market faced large declines during this period of time. This financial crisis was a nightmares to not only to the government but to the people too. Hence, various shades of the crisis was seen and presented.
Causes of the Russian Financial Crisis of 2014- 15
- Fall in the oil prices: Russian’s economy is heavily dependent on the exports of crude oil and natural gas. Roughly 50% of Russia’s revenue comes from this. Due to the boom in American shale oil production, in February 2014, the prices of oil collapsed from $100 per barrel in June 2014 to about $30 per barrel in December 2014, cutting deep into the country’s major source of revenue. For every $1 decline in crude oil prices, the Russian economy lost billions of dollars. Hence the economy of Russia suffered from Dutch disease, a situation in which a country’s main focus is on the development of the natural resources of the country than on the other economic activity. As the oil prices fell, Russia continued to sell without increasing the production for the compensation for the lower price and therefore due to reduction in profit, the income generated by the government was substantially low.
- Government sanctions: The second reason behind the financial crisis was the US sanctions which was placed on Russian government and companies. The oil industry was deprived of technology and expertise because of the sanctions and it also led to the denial for the lending by Western financial institution to Russia. The US administration imposed sanctions on the Russian government in February 2014 for the attack on Crimea. According to the Prime Minister of Russia, Dmitry Medvedev the sanctions cost was $26.7 billion in 2014.
- Inflation: The fall in ruble led to inflation. In 2015, inflation remained above 15%. The consequences of sanction on Russia also led to the increase in the prices of food in the country. This further exceeded wage growth and real income began to fall. According to the Central Bank, there was reduction in the household spending by around 9%, undermining a key driver of economic growth. Around 2.3 million fell into poverty according to the statistics of Rosstat state statistics service.
- Import replacement: Local production boosted up to replace more expensive foreign goods when the Russian ruble was weak. Almost all the industry’s production fell but among that one industry did expand was agriculture. When the imports were banned and the government called for self-sufficiency for the national security, this gave the reason for speeding up the agriculture production. At a press conference in December Putin said “As other sectors of the economy shrank, agriculture is demonstrating positive dynamics with an at least 3% growth”. This gave a view of increase in one industry production.
- Unemployment: During that period of crisis, unemployment stayed low, at around 5.5%. The labor supply also fell down as the migrant workers who were given employment were fired from their jobs due to the weakening of ruble.
Analysis of the Financial Crisis
Russia’s situation got worse when it entered the conflict with Ukraine. Investors, however in the short run priced the possibility of a full scale war into projects in Russia and in the long term sanctions affected the investments. This also affected the access to the capital by the businesses prevailing in Russia and as a consequence, growth. Despite this, in 2016 and 2017 the growth rate of Russia grew quickly. This means that the recovery pace was high. In 2016, Russia returned to growth quickly with 0.3% and 1.5% in 2017. The graph below shows the sudden contraction and partial rebound in the Russian economy. This data is being collected by World Bank.
Source: World Bank
The contribution of the ruble’s sudden loss in the value was falling oil prices and sanction with high demand of foreign currencies. That time the currency hit nearly 100 rubles to the dollar in the day’s trading. The Central Bank of the Russian Federation and the Russian government took steps to bring the situation under control immediately after the crisis broke out. The interest rates were increased to 17% and for major businesses with foreign loans, refinancing program was announced. Some restrictions regarding bank lending were also relaxed. The graph below shows the sudden drop in the Russian ruble value.
Impact of Financial Crisis
The financial crisis in Russia did not impact only the financial market, the investors or the trade of the country. It impacted the country as a whole, the Russian business and the people of Russia too. The economics crisis that happened had three main causes. The political issues with the West impacted the condition of individual sectors and individual large companies. The most visible consequence among every other thing, the devaluation of rubble denominated led the dollar-denominated capitalization of many banks and companies to fall more. The US dollar denominated the stock exchange index RTS. The access to the credit in the domestic market and abroad was now a tough task for Russia. The rise in inflation also led to driving up various costs of the doing business and the declining domestic demand for goods and services had suppressed revenues.
As we know that the energy sector is the pillar of Russian economy, due to the weakening of ruble the industry suffered from the negative impacts such as the sudden slump in the prices of oil, low volume of gas exports and western financial sanctions. It was reported that during this period there low production volume which was a remarkable thing in the entire Russian history. This happened due to the decrease in exports in the aftermath of the Ukrainian crisis. Not only this, the various other energy giants reported the decrease in the capitalization as there was depreciation in the ruble’s value. The aviation industry faced nearly 80% decrease in the capital. The automotive industry had a loss of around 10% which made them to think to close various companies. In tourism sector, the tour operators faced solvency problems mainly due to the fall in real wages. Thus, the crashing of ruble led to the fall in the listing of Western companies that had major investment in Russia. Some of the large companies like Apple and Volvo halted their business activities due to the high volatility and decline of ruble.
Talking about the impact of the crisis on the people in Russia, the common people started to feel the deteriorating economic situation. This especially meant in the form of riding inflation, particularly in the food and agriculture sector and a fall in real wages. Due to the shrink in the financial reserve and increment in the prices more than 5.5%, the government was not in the position to do anything to adjust wages. Thus, real incomes in November, 2014 turned out to be 4.7% lower than that in November, 2013. The people were now in the fear of losing their jobs as the unemployment rates went up during this period. According to the public opinion survey more than 20% of the people who were in the position to afford goods had to give up buying them. The prices of food items like meat, fish and grain hiked up too. Many Russians decided to purchase durable goods such as washing machines, televisions, jewelry to get rid of Russian rubles. They also changed their savings and pension money from rubbles to US dollars or euros.
Policy Suggestions
There are no such policies related to this financial crisis. The adoption of market based budgetary, monetary and exchange rate policies by the technocrats in the Ministry of Finance, Russia helped them to steer the economy through the financial crisis. But these instruments are not enough to alter the situation of big business loss. As we know that Russia is largely dependent on the export of oil and natural gas, they should have a pretty flexible system to tackle with their revenues during these types of crisis. The crisis does not happened only in the year 2014 but it happened during 1998 too. Regarding the falling value of Russian ruble, the policy should be made as a backup to provide the people or Russia easy access of conversing the currency into US dollar or euro as people out of fear started converting their pension money into the same.
Conclusion
By studying this financial crisis, we got an idea that how a country situation gets worse both in terms of economic and social. Through this we got the idea of how a country should refrain itself and what measures should be taken in order to avoid this kind of situation. We also got to know how the black year of Russia turned out to be the powerful economy again.
References
Desai, Padma (2010). Russia’s Financial Crisis: Economics Setback and Policy Responses. Retrieved from: https://www.jstor.org/stable/pdf/24384339.pdf?refreqid=excelsior%3Aa8e2ba360d06256b8a4779147b53cadc
OSW Report (2015). The Economic and Financial Crisis in Russia. Retrieved from: https://www.osw.waw.pl/sites/default/files/raport_crisis_in_russia_net.pdf
Sakshi Goyal 