The Russian Economy

The Russian Economy

Recovery, Dependency, and the Need of Sustainability

02/2017  | Reading time: 6 minutes

2014 was a fateful year for the Russian economy, as the decline in oil prices and economic sanctions, in context with the armed conflict in Ukraine, directly affected economic growth in the country. The moderate growth of 0.6% in 2014 and the contraction of 3.7% in 2015 stand therefore in direct correlation to these events. Nevertheless, the Russian Central Bank anticipates that the Russian economy contracted relatively moderately (between 0.3% and 0.7%) in 2016, which is also directly related to the Urals oil prices. 

As a result of the economic downturn, the yearly CPI inflation rate was 15.55% in 2015 but decreased to 7.8% in 2016. In comparison to the pre-crisis export situation in 2013, the rate of export decreased to 65% in January 2016. However, since then, Russia’s export has recovered constantly (10% by August). In the context of the Russian budget, it has to be mentioned that the budget deficit in 2015 was 2.7 trillion RUB, which equals 3.8% of the whole country’s GDP. Altogether, it is remarkable that certain branches of the Russian economy are recovering, while the budget deficit and the constant dependency on fossil fuels restrain the country.  

The Russian ruble depends on the oil price
Shutterstock

The moderate drop of the Russian economy can be explained by four main reasons. First, there is a continuous demand for raw materials from Russia, which supports the stabilization process of its economy independently of current oil prices. Second, Russia’s fiscal policy is strongly connected to the oil price, but not to the oil companies themselves. As a result of this relative independence, Russian oil companies and other companies in the raw-material sector lowered production costs in comparison to their international competitors, because of the drastic devaluation of the ruble. At the same time, Russia’s policy of freezing wages in the public sector prevented expectations for across-the-board wage increases in the private sector. Third, the Central Bank of Russia reduced its key interest rate stepwise to 11% in July 2015 (after increasing the interest rate to 17% in December 2014) and reduced its exchange rate controls in favour of a free-float exchange rate system. In hindsight, both market-friendly strategies had a positive impact on the stabilization of the financial market. Moreover, the investments in the Russian military since 2015 have played a significant role in the preservation of Russian industry, which can be seen as the fourth reason for the moderate drop of Russian economy. 

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