- A significant market impact – the rouble has lost more than 34 per cent of its value on a basket basis already this year, Russia’s external borrowing costs have risen (its 5Y CDS [5-year credit default swaps] is wider by 150bps since June), with local interbank borrowing rates close to doubling over the past six months to 13 per cent a year – increasing the cost for local borrowers. Russian equity indices have lost around a third of their dollar value this year, but this comes after three or four years of under-performance. Russian borrowers are largely closed out of international capital markets, which is accentuating the dollar squeeze at home, pressure on the rouble and increased borrowing costs.
- Central bank reserves have declined by around $90bn (close to a fifth) over the course of the year, with capital flight thought to have doubled over the year to perhaps around $120bn. However, reserves are still at an elevated level of about $420bn – over 12 months of import cover. In recent weeks the CBR [Central Bank of Russia] has stepped away from intervention in defence of the rouble, perhaps looking to conserve FX [foreign exchange] reserves to use these for fire-fighting later should systemic problems appear as a result of the weaker currency, e.g. in the banking sector.
- The impact on economic activity has been difficult to discern, with Q3 2014 real GDP growth slowing to 0.7 per cent from 0.8 per cent in Q2, but remaining in positive territory. A range of other indicators, from IP [industrial production] , to retail sales, to investment in productive capacity all remained weak or contracting, but outright recession has been avoided. Unemployment has also remained low, at close to 5 per cent, as Russian companies appear to be conserving labour and waiting to see. Perhaps this resilience reflects the positive impact of the weaker rouble, or perhaps oil and sanctions stalled an imminent recovery – note that government officials had previously been predicting an acceleration of growth to 1-2 per cent over the next year and that now the consensus is zero to 1 per cent, suggesting a combined impact of sanctions and lower oil prices of around 1 percentage point of growth.
- Inflation has accelerated, rising to 8.3 per cent by October, from just below 6 per cent earlier in the year, reflective of exchange rate pass through that seems to be accelerating.
- The budget has remained in surplus, posting a surplus of 1.9 per cent of GDP for the period January – October, helped by higher inflation and the devaluation of the rouble, which inflates the rouble value of dollar oil receipts. The budget for 2015 appears to have been constructed on optimistic assumptions of oil averaging $95 a barrel, and finance ministry officials have suggested that budget cuts will be required to cover a potential Rs1tn ($19bn) shortfall. Budget cuts may prove pro-cyclical amid stalling activity and could well tip the economy into recession in 2015.
The economic war against Russia
Supposedly to ‘punish’ Russia for the successes of the resistance in Ukraine to the US-backed fascist coup, the ‘international community’, i.e., the imperialist powers of the world, have declared economic war against it, endeavouring to cause such damage to its economy, and suffering to its population, that it will give up all and any resistance to imperialist demands. Hitherto the US has deployed this tactic with impunity – if without much in the way of success – against countries without the power to retaliate. Russia, however, is a very different kettle of fish. Damage to Russian economy The combination of sanctions, imposed since July 2014, and a plummeting oil price that is the consequence of Saudi Arabia’s decision not to cut oil production in line with the fall in world demand for oil, has certainly wreaked havoc on the Russian economy: “Reviewing the impact of lower oil prices/sanctions/geopolitical risk already on Russia, we can observe:
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