Russia Faces Recession, Bank Failures on Plummeting Oil

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.

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.

Brent crude fell to a five-year low at the beginning of this week, falling below $68 a barrel as analysts predict further declines in energy prices ahead. Meanwhile, the ruble has lost nearly 60% of its value, falling to 54 against the U.S. dollar. Because of its dependence on oil exports, the Russian currency connects closely to the price of oil, and further declines could eradicate the value of Russian domestic currency holdings.

Russians Upbeat Despite Economic Woes

Quoting a “friend of Putin,” Bloomberg reports that Russian policymakers are not afraid of sanctions, citing the two-year Leningrad siege as a testament of Russia’s powers of endurance. Meanwhile, public polls in Russia show that many Russians do not take the sanctions seriously. According to the Levada Center, a Moscow-based research group, half of survey respondents said the sanctions were causing no hardship and 31% said problems arising from the sanctions are not serious. An earlier survey showed that 86% of Russians are proud to live in Russia.

The patriotism and case for resilience against western powers is ensuring the Russian facade of defiance remains secure. However, the Russian government admitted that the nation is likely to fall into a recession.

Russia expects its GDP to fall 0.8% in 2015, a sharp reversal from earlier predictions of 1.2% growth. Finance Minister Anton Siluanov said a GDP decline over the next two quarters is likely.

The Russian government has canceled a bond auction while pledging to support Gazprombank with a $740 million injection, as foreign sanctions cripple the bank’s ability to borrow abroad.

Retail sales are expected to fall 3.8% in 2015, and unemployment may increase to 6.4% at the same time. Real wages will also fall 3.9% as inflation mixes with flat wages to further impoverish the Russian population.

Inflation has already risen 9% in 2014 in Russia, but that may slow to 7.5% in 2015.

Reserve Fund Tapped

To finance operations, the Russian government is planning to spend $88.9 billion of its reserve fund, which has already declined in recent months as the government attempted to stabilize the slumping ruble.

Maxim Oreshkin, Head of Strategic Planning for Russia’s Finance Ministry, said the government’s reserve tapping and growth rates assume an optimistic rise in oil prices, from under $70 currently to $80 in 2015. If oil fails to rise in price, Russia’s inflation rate and GDP contraction could be substantially worse than predicted.

“We consider this assessment pessimistic in principle,” Oreshkin said.

Further devaluations and economic contractions are likely to result from the rising rate of foreign capital outflows. Finance Minister Anton Siluanov has said outflows could rise to $130 billion in 2014, and further outflows are likely in 2015.

At the same time, Russian ministers are insisting that the country’s economic condition remains healthy. “The economy, however, is adapting to the new conditions. That is why the slump may not be that dramatic. Adaptive possibilities of the Russian economy may prove to be more considerable,” said Elena Lashkina, an aide to Russia’s Minister of Economic Development.