With oil prices showing no signs of surging anytime soon and western sanctions on Russia because of their behavior in the Ukraine, the Russian economy is set to plunge into a recession in 2015, as per a warning issued by the country’s financial authorities. Adding to the pessimistic outlook, the ministry has estimated the GDP will sink by 0.8%, which is in stark contrast to the earlier forecast of a GDP growth of 1.2%.
Russia’s reserves of foreign assets fell by $15.7 billion in one week as the ruble saw signs of strength.
The Russian government continues to sell foreign reserves in an attempt to keep the ruble from falling, causing the nation’s foreign reserves to fall to $399 billion by December 19, and 22% below the peak holdings for the country. Russian authorities raised interest rates but so far resisted instituting capital controls that would limit the amount of rubles sold on open markets.
With a plunging currency and liquidity fears, Russia has turned to China for help in staving off a protracted economic decline, and Chinese lawmakers are receptive to their needs.
Chinese officials announced Tuesday that they would enlarge a currency swap program with Russia, which is already $24 billion. The news helped the ruble rise 4.9%, although it has since fallen 0.53% to 54.70.
The U.S. dollar strengthened relative to emerging market currencies, and is now up approximately 2% over the past month against most foreign currencies.
2015 might not be a very pleasant one for Russia. The country faces the worst of financial failures since 1998. The Ukraine conflict, exclusion from G8, western sanctions; a high inflation, falling GDP growth and rising unemployment had already been heating the economy. But with the falling oil prices and domestic currency losing its value, Russia got caught in a perfect storm.
Winston Churchill famously said of Russian foreign policy that it was “…a riddle, wrapped in a mystery, inside an enigma.” What people leave out is what followed. Churchill offered an answer: “… perhaps there is a key. That key is Russian national interest.”
And so it is.
A nation catches ‘Dutch disease’, when it relies heavily on a single commodity and fails to diversify its economy. Structural weaknesses have combined with falling oil prices and sanctions to derail the Russian economy.
Reeling under unforgiving inflation forced Russia to increase the country’s key interest rate to 10.5%, which is one percentage point higher than the current interest rate. This is the second time in the last couple of months that Russia’s Central Bank has had to take such a measure. Note that just six weeks back, interest rates increased from 8% to 9.5%, shocking consumers.
Plummeting oil prices and European sanctions are causing bank panics and a deepening recession in Russia, despite Putin’s public confidence and pivot towards Turkey and Asia.
The United States’ “pivot to Asia” has been intensely discussed over the last years. But recently, a new pivot model has come up: the Russian Federation’s pivot to Asia. This article analyzes this topic from an economic perspective by asking: Is the Russian economy really about to shift its focus thus far centered on the European Union (EU) to Asia?
The following events have been heating up this discussion:
The Bank of Russia has been seeing a lot of economic trouble over the recent months. Not so long ago, the bank announced that the benchmark interest rate had been raised from 8% to 9.5% in an attempt to rein in potential inflation.
The inflation rate is currently above 8% and still rising, which signifies a serious economic issue within the country, especially when combined with the continuing decline of the ruble. The currency within Russia is trading at standards that are historically low against other major countries.
