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 Similarly, the will to invest in Russia can be measured by the bond yields which are only superseded by the time of the economic crisis 2008 (in which people seldom want to invest):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.