What next for Russia’s economy?

Russia’s Ministry of Economic Development announced on Tuesday that the country was falling into recession:

The new macroeconomic forecast is expected to decrease by 0.8% of GDP in 2015, in the September forecast it was an increase of 1.2%. One of the main reasons for the revision was the decrease in the forecast average price of Urals crude in the next year from $ 100 to $ 80 per barrel. In addition, the previous version of the forecast Ministry expects the lifting of sanctions by the middle of 2015, and now comes from the fact that the sanctions will be valid until the end of 2015.

The announcement comes as the Russian currency lost 6% of its value against the dollar at the beginning of the week, taking the slide in the value of the currency to over 60% since the beginning of the year. The rouble’s slide is one of numerous economic troubles captured in this data post from Bloomberg:

Faced with collapsing oil prices and sanctions from the west, the Russian economy is on the verge of going into recession. The ruble is collapsing, inflation is spiking, and the Russian Central Bank is depleting its reserves of foreign currency, limiting its ability to prop up its own currency.

One of the most significant factors contributing to Russia’s complexity is the drop in the price of oil, close to 40% since June. Martin Wolf in the Financial Times draws a parallel with the mid-1980s:

The sharp fall … was caused by two developments: the reduction in the energy intensity of consumption and production triggered by the two “oil shocks” of the 1970s; and the emergence of significant production in non-Opec countries, such as Mexico and the UK. The story this time is not so different, particularly on the supply side.

It is too early to tell whether the drop in prices will last, says Wolf, and economics commentators are not short of opinions on causes and consequences. Nonetheless, a sustained drop in the price of oil will be good for the global economy, according to The Economist, as a 10% change in the oil price flows through to some 0.2% of global GDP. Russia, however:

Will suffer a slowdown. For years, real incomes rose, thanks to wage increases in the state sector. The increased spending went on imports made cheaper by a strong currency. So the slide in the rouble is cutting living standards by making imports dearer. Western sanctions have closed capital markets to Russian firms, even private ones. Business activity is waning.

The currency crash in Russia is creating difficulties for Bank of Russia Governor Elvira Nabiullina, who remained upbeat in a recent speech to the Bank of international Settlements, presenting the following base case:

In the first half of 2015, in our view, factors limiting investment activity will remain, and investment activity is one of the key elements that can affect the trends in economic growth. However, with the normalisation of the external economic environment and opening up of access to the global capital markets for Russian companies, the investment demand will gradually recover. Implementation of large infrastructure financing projects, including energy export project in the framework of co-operation with China, will also contribute to the investment growth. According to our estimates, the decline in fixed capital investment will cease in 2015, and in 2016-2017 the investment growth rate will gradually pick up … In the baseline scenario, we expect an acceleration of the GDP growth from 0.4% in 2014 (these are our assessments for this year) to 1.0% in 2015, 1.9% in 2016 and 2.3% in 2017.

Trying times for the Bank of Russia and the “clear-sighted and methodical” woman at its helm.

Author: Mike Hanley, Senior Director, Public Engagement Group, World Economic Forum.

Image: A board showing currency exchange rates, in front of a monument to Prince Yury Dolgoruky who founded Moscow in 1147, in the capital Moscow, December 1, 2014. REUTERS/Sergei Karpukhin