Plummeting Oil Prices, Sanctions to Sink Russia into a Recession

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%.

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%.

The sharp cutback on the growth estimate is a clear indicator of the double impact that plummeting oil process and sanctions over Ukraine are having on the Russian economy.

Whereas oil price dips have been affecting all major global economies, the latter of the two forces is more cause of concern for Russian financial authorities. Not only will the sanctions mean closure of capital markets for several prominent banks and lending institutions in Russia, but also will lead to an unhealthy and stifled investment environment, with a definite want of financial security.

Understanding the Impact in Real Numbers

Russia has been finding it hard to come to terms with the dynamic global financial environment ever since recovering from the contagious recession in 2009. Growth fell from a meager 3.4% in 2012 to a downright paltry 1.3% in 2013.

With the easing growth and seemingly uncertain financial future, Russia is set to see another depression. In addition, just as America is shooting itself in the foot because it is not allowing more oil shale development, Russia is doing this by its aggressive actions in Ukraine. Moreover, a slowing economy and rising inflation are also going to take down real incomes by an expected 2.8% next year, which is a rude shock over the earlier expected increase of 0.4% in the current year.

To make matters worse, Ukraine sanctions have forced the financial ministry in Russia to scale back its estimate of oil barrel prices from $100 apiece to $80 apiece for the coming year. Considering the appreciable contribution of oil and gas exports towards Russia’s GDP, the forecasts are dismal. The ministry has also indicated the inflation could soon touch 9%, up by 1.5% from the current mark of 7.5%.

Weak Economic Forecasts Send the Rouble Lower

The heat of the falling pulse of Russia’s economy is catching up with the national currency, with Rouble falling to 53.55 to the USD, a 5% dip. Investors are wary of the external and internal pressures that Russian economy is facing, and the concerns are visible in the financial symptoms recorded in the global investment market. From the beginning of the year to the end of November, Rouble has fallen nearly 40% relative to the US Dollar.

The market sell offs are reminiscent of the debt default situation that Russia faced in 1998, and have forced the government to intervene and stem the tide to some extent. With OPEC refusing to cut production, oil prices do not seem to be strengthening anytime soon, and with that, Russia’s economic woes are set to struggle in 2015.