The last few months have rocked the Russian economy as a number of factors have left the nation struggling for growth. Last Monday, The Bank of Russia lifted interest rates to 17 percent, up from 10.5 percent, in an attempt to stop a steep depreciation of the ruble. The rates rise has not stopped the rout, as the ruble has continued to fall. The oil price is another factor that is causing Mr Putin countless sleepless nights, as the ruble sell-off could be blamed on the fall in the price of crude oil. ICE January Brent fell below $60 a barrel on Tuesday, a five and a half year low and roughly half the $115 a barrel price of six months ago. Oil and gas account for roughly 75% of Russia’s exports and more than half the government’s budget revenue. The current price is $61.38, however with increasing supply from the United States, the price could continue to fall during 2015.
Inflation hit 9.1 per cent in November therefore making the job of The Bank of Russia even more challenging. With the steep depreciation of the ruble feeding into higher import costs, economists fear inflation could rise at a double-digit pace early in the New Year. This would therefore squeeze consumers’ income, weighing on consumption. The Bank of Russia has a 4 per cent inflation target in the medium term, however this will be impossible to meet unless the currency is stabilised.
The Bank of Russia has spent much of this year trying to prop up the ruble, therefore causing its foreign reserves to fall roughly $99bn to $400bn. In November, Governor Elvira Nabiullina chose to fully float the currency whilst retaining the right to step in to prevent a crisis. Since the announcement the Central Bank has since resumed its interventions but on a limited scale, preferring to use interest rates as its main line of defense. These factors have had a dramatic effect as the economy has stagnated this year under the weight of the weakening ruble and Western economic sanctions arising from the Ukraine crisis. The Russian Central Bank said this week that it expects the economy to contract by about 4.5 percent next year and 0.9 percent in 2016.
Nevertheless, it can be considered a necessary transition period for the Russian economy, which is heavily reliant on oil and gas. Unfortunately, as evident from the experience of other countries, these transformations can be rather painful as they look to achieve sustainable growth for future generations.