As a follow-up to a previous blog post on Ukraine I will now discuss it’s counterpart in the news, Russia. As mentioned earlier, Ukraine’s economy is in a lot of trouble. While Russia’s economy might seem more stable in some aspects, mostly due to the lack of transparency from the government to the public, they are in reality in a lot of trouble. They are in need of structural reforms that will take a long time to implement. In the first two weeks of 2015 the ruble, Russia’s currency, fell by 17.5% against the dollar. Much of this has to do with the oil industry and as oil is Russia’s main export and has declined to below $50/barrel while their original budget was calculated on $100/barrel which comes out to 3 trillion rubles or 45 billion dollars. This was 20% of the planned revenues according to Anton Siluanov, the finance minister. Additionally inflation is up into the double digits and this means that real incomes will decline for the first time since President Putin has been in office starting in 2000.
Looking at this decline in perspective in 2008-2009, generally a hard economic time, Russia’s GDP contracted by 7.5% and the government was able to come out the other end by stimulating demand by increasing public spending and bailing out struggling firms. They no longer have this luxury as their reserves have depleted significantly. Many believe that Russia has significant structural inefficiencies that need to be addressed although they are still fighting a war and do not necessarily have the resources to do so at this time. However, the corruption within the market has been shown to push out the most efficient companies and these inefficiencies need to be addressed before Russia can really start to gain confidence back in their economy.
What do you think Russia’s next move should be?
3 Comments
Wide-ranging reform might require a separation of politics and business. Then both sink or swim on their own merits. We in the US have far fewer problems because the two are cleanly separated, right? – our politicians don’t depend upon business types to gain office and wield power, and big businesses in the US don’t try to get the rules written in their favor.
Can you all pose alternate hypotheses for why Russia has problems, hypotheses that are not ones of political economy? I can think of several, you should be able to do so as well.
To answer professor’s question, I think one of the alternate hypothesis for Russia’s current problem is definitely the falling global oil price. As Russia is one of the world’s largest oil producers, the current trend in oil price must be quite a blow for its economy. According to the estimate by World Bank, Russia loses about $2billion in revenues for every dollar fall in the oil price. They also give a grim prediction that Russia’s economy would shrink by at least 0.7% in 2015 if oil prices do not recover by then.
I think one piece that was left out of your article here but mentioned in the Ukraine post was the sanctions Russia is facing since the beginning of the Ukraine conflict. Clearly oil is it top export, but how are the trade sanctions effecting both their imports and exports?
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