The Russian Economy: The Last Days of Rome?

There has been a lot of negative development when it comes to the Russian economy that is worth looking closely at. The GDP growth for 2014 has dropped around 2% which is a huge figure. Let us avoid mirror-imaging, but imaging how a Western government would survive if they produce 2% lower growth than projected.

One of the most alarming indicators is that the Rouble is lower than ever. The coming years it is projected to be still around 0,1% which is very low when the inflation looks as the following (or actually the most recent is higher with 8,03%):

Inflation, N.B. Current is 8,03%
Inflation 2013-2014, N.B. Current is 8,03%

In early October, the Russian central bank spent $1,75 billion (ca 8 miljarder SEK) just in two days try to buoy the rouble. Below we can see how well it fared.

Strength of the Russian Ruble to the Dollar
Strength of the Russian Rouble to the Dollar

The Russian central bank projected a capital flight up to $100 billion in 2014, up from $61 billion from 2013, but that figure has been exceeded. The head of the European Central Bank, Mario Draghi, projected that $214 billion has already been surpassed.

This is a consequence of Western limitations on Russian companies and banks on Western markets. Any types of long-terms loans are hindered and it is when their repayment comes, that the real problems start. In this, there is an in-built delay in sanctions. To illustrate, before the end of the year $54,7 billion of debt needs to be repaid and the chances to get new loans look dire. Similarly, the will to invest in Russia can be measured by the bond yields which are only superseded by the time of the economic crisis 2008 (in which people seldom want to invest):

Russian 10 year bond yields
Russian 10 year bond yields

Adding onion to the salmon as one say in Sweden is the dropping oil prices which is the single most important factor depending Russian economic performance. It is lower that it has been in a while and the projections I have seen says that Russia need $117-119/barrel to sustain its public finances. This is something that the current levels are far from and the recent developments in exporting LNG (liquified natural gas) is likely to only lower the price.

Crude Brent Price
Crude Brent Price

Before concluding this dystopic exposé, I just want to add that it is true that Russia has indeed been aiming to build financial-strategic resilience. They mortgaged their national debt very quickly when the oil revenues started coming in the mid 00’s and they quickly built up the world’s fourth largest gold reserve in the recent years.

Nonetheless, these cannot substitute a functioning economy and the situation looks dire in Russia. Pensions and public spending has already been cut and there is likely to be no alternative to cutting the financing to the reform of the Armed Forces (projected to go up from 3,5% to 4,2% during 2015-2017). If Russia decides to stick with it, that might be their last days of Rome-fest. More seriously for the Russian society, this represents a serious blow to Russian modernisation and strive to join the 21st century. The economic performance poses formidable challenges for internal and international security.

10 thoughts on “The Russian Economy: The Last Days of Rome?

  1. Nicely presented, easily understood. As an American I have a hypothetical question for you. If, if Putin were to send his ‘little green men’ into Latvia and Estonia, do you believe NATO would risk world war three and respond with a total military mobilization and intervention? I know Article 5, but do you believe they would go to war?

    Second, what would Sweden’s response be, without consideration to NATO’s response?

    Thank you for your blog and your consideration.

    1. Cheers! 1) NATO is based on Article 5, if that is not credible, the organisation is not. Yes, no aggression would be tolerated. 2) We have given a declaration of solidarity and I think we will keep it, the question is with what and to what extent.

    1. It definitely has, I think it makes him less popular at home, both among the people and among the elite he needs to satisfy. This might increase repression and the lure of foreign adventurism.

  2. It’s true that in order to avoid any deficit the Russian budget needs an average oil barrel’s price close to 100$, but it was only true with the ratio 1$=32 Rubles. Now with 1$=45 Rubles the russian government is allowed to maintain the spendings as expected for 2014-2015 (probably not during 2016-2018). We also need to focus our attention on the capacity of the American Shale oil industry to survive to low oil price. Some experts report that 65$ per Barrel is not enought for this industry to break even. Morever we can also wonder if a country like Russia which has a 13% GDP public debt really needs to worry about a public deficit. Germany which is known as the wealthiest European state has a 81%GDP public debt…

    About a depreciated currency we need to remember that a devaluation is widely seen as a cheat in modern economy because it is one of the most powerful way to strengthened the economy, especially when the country has a large trade surplus such has Russian one. We need to remember that in 1933 when Roosvelt came to power, one of his first decision to save the american industry was to depreciate the dollar by 30% (In 1933 1 ounce = 21$, in 1934 1 ounce = 35$). By the way over the last 15 years American FED’s chiefs have always blamed the Chinese Central Bank for cheating on the rate of the Yuan, American economists arguing that the Yuan was underevaluated.

    The main issue as an European citizen is that even with Western sanctions, with EU’s recession which is the main trading partner of Russia with almost 50% of the external trading , Russia’s GDP is still growing. The rate is pretty low (close to 0.5% over the first 7 months of 2014) and surely not enought for a country such as Russia but it remains a real success for the russian leaders. The russian economy is likely going to be more competitive while the European goods are going to be less competitive. Volkswagen car’s sell in Russia has collapsed by more than 25% this year (we have to remember than following the depreciation of Ruble in septembrer the German GDP growth forecast fall from 1.7% to 1.2%). All the russian businesses are now meeting a good opportunity to make Russia a real industrialized country and not a mid-industrialized country relying more on oil and gas exportations than on an efficient industry. We will see during the next years if Russia succed in this transformation, Russia needs it and can’t only rely anymore on the classical pattern of oil/gas’ large exportations to Western countries.

    All this facts and figures are going to encourage Russia to see the Western world as a very unreliable economic and political partner. Russia is supposed to be punished because of his involving in Crimean affairs when on the other hand Israël who has killed more than 3,000 people in Gaza this summer is not facing any sanctions from the European institutions. Even if there is no doubt that Israël have been directly bombing UN’s schools… We could also dream about an European Parliament blaming the US for their intervention in Irak in 2003 and more than 300,000 people died there over the last 11 years… This will probably have many consequences and the main one will be to encourage Russia to creat closer cooperations with China.

    By sanctionning Russia the western leaders wanted to make Russia act the way the’ve decided, by accepting NATO expansion to Russia’s borders instead of taking account of Russian fears (NATO 1,000 billions dollars of military expeditures, Russia 95 billions, who is the real threat ??).

    President Medvedev was talking 5 years ago about a global security alliance “From Vancouver to Vladivostok…” which could have been one of the best way to avoid every kind of conflict in Europe. But due to the arrogance of the Western leaders we are maybe going to see during the next decade a global Russian-Chineese Security Alliance starting from the south east of The Chineese sea to the shores of the Baltic Sea.
    It won’t be the first time that European leaders are committing huge misteak by despising Russia, in 1938 at Munich’s conference the French and English heads of states had already denied any kind of cooperation with Russia. This arrogance made the last days of Rome for France and UK’s position as superpowers…

    1. With respect to the last part of the comments by Pierre, it might be useful to study the origin if the Molotov–Ribbentrop Pact and the Nazi – Soviet military cooperation during the 30s. Here is the opinion of the present Russian ledearship on that:

      The Russian economy is a disaster and their domestic industrial production is very small,, not to mention the export.

      Here is a quizz: If the raw materials are excluded from the Russian export name a country with a similar export volume? Hint check this

      The question is how will the Russian society recover from the kleptocracy? Hopefully, it will a peaceful transition and not a revolution.

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