News

Russian economy hit by oil prices and a weak currency

Russia’s Gross Domestic Product (GDP) fell by 3.7% in 2015, according to preliminary estimated figures released by the Federal Statistics Service [1].

Retail sales were down by 10% and capital investment fell by 8.4%, marking the economy’s worst performance since 2009, of which GDP figures dropped -8% [2].

The economy is facing new pressures from a weak currency and a decline in the price of oil. Vladimir Miklashevsky, a strategist at Danske Bank said: “The economy’s going through big adjustments – it’s still addicted to oil. The weak ruble and import substitution will continue to support local production, although on a moderate path. It’s a long and painful journey to recovery” [1].

The ruble has lost more than 7% against the dollar this year. The Russian economy is heavily reliant on energy exports driven by the government, with a lack of diversification in other sectors. Combining this with the drop in oil prices and volatility in the global markets, Russia is being directly impacted [2].

Governor for the Bank of Russia, Elvira Nabiullina, has said the regulator is “vigilantly” monitoring the currency situation, and is ready to intervene [1].

Parts of the Russian industry have struggled to obtain bank loans because the banking sector has not been able to access Western finance. This is due to sanctions related to the Ukraine crisis, with ultra-high inflation amid recession.

The Russian government is setting aside 135 billion rubles ($1.7 billion) to help the economy in a crisis; the funds have been drawn from an unspent budget from 2015. The likelihood of needing to use these funds is understood to be “very low” [3].

Several economic advisers to Putin say his preference is to preserve the country’s reserves, even if that means economic growth suffers. The economy is expected to shrink further by up to 1% this year, before reinvestment, for example, gaining finance or goods through other means, to help the economy grow again [3].

 

[1] Bloomberg. ‘Russian economy shrinks most since 2009 as oil prices sink’. bloomberg.com

[2] BBC News. ‘Russian economy hit by oil prices slide’. bbc.co.uk

[3] Reuters. ‘RPT – Russia allots $1.7bn for real economy in draft anti-crisis plan’. in.reuters.com