By the beginning of 2014, the Russian economy hdad amassed an entire array of negative trends – weakening market and legal institutions, public sector expansion, chronic capital outflow, business mistrust, low business activity, and declining investments. A shift has also occurred towards ongoing stagnation under conditions of heightened consumption. The situation was further complicated by U.S. and EU sanctions against Russia, as well as a drop in oil prices and the subsequent depreciation of the ruble.
As Akindinova and Yasin note, of all sanctions introduced against Russia, the most negative impact on the Russian economy come from restrictions on raising financing. As of early 2015, the foreign debt of financial and nonfinancial corporations was $547.6 billion. The government has received countless requests for financial support from sanctioned companies and banks, which has created constant pressure on foreign reserves and the National Welfare Fund.
Between July 2014 and January 2015, the price of a barrel of Urals crude oil fell from $113.70 to $43.30, which is similar to previous oil crises, but this time, the researchers say prices are less likely to bounce back to previous levels quickly.
HSE's experts believe there are two possible scenarios for oil prices:
In addition, traditional exporters and producers are against shale oil and this might be accompanied by increased volatility on the oil market and alternating periods of increased prices, which will cause production to expand at shale wells and at wells that are hard to reach.
The ruble's exchange rate against the dollar and euro began falling in autumn 2014 after oil prices dropped. In early November last year, the Russian Central Bank announced that it was doing away with a floating currency corridor and with regular currency interventions. This actually meant that the bank was switching to a floating exchange rate two months ahead of schedule. The sharp rise in the Central Bank’s key rate to 17%, as well as informal presidential orders to exporters, allowed for the market to stabilise, though the cost of resources grew. For banks and their clients, this meant decreased access to loans and an increase in the appeal of deposits, which helped limit the extent of deposit withdrawals and lower the risk of a banking crisis.
Most negatively, the forex crisis undermined trust in the ruble, which pushed the public to convert savings from rubles into foreign currency. In addition, companies and banks rushed to accumulate forex assets.
Mistrust was also seen in the temporary abandonment of the ruble in international payments, even by countries close to Russia, such as Belarus. In addition, this lack of trust was demonstrated when imported goods stopped being shipped under existing contracts, while the appreciation of Russian companies’ forex debt serves at yet another negative result of international sanctions. As concerns the public, this problem has already led to debtors being unable to service foreign currency mortgages.
By analysing economic trends, the researchers identified three main stages of the crisis.
The first phase – the forex crisis – has already taken place. This was the most intense stage of the crisis and occurred in December 2014.
The second phase is decline and restructuring. Both companies and the public can expect a shocking decline in income due to Russia’s decreased forex revenues and because of inflationary and devaluation shocks. Overcoming the negative results of this phase depends on economic restructuring, the ‘dying off’ of unviable enterprises, and growth for promising industries.
The third and final phase is the formation of new sources of private investments and the implementation of the institutional reforms needed for this – economic, legal, and political. Without solving this task, it is hard to expect the economy to grow on the scale required. After all, in order to become a developed country by 2050, Russia has to grow at least twice as fast, and because of unfavourable demographics, this growth might only occur if workforce productivity increases.
The process of restructuring the economy when oil prices are low and the ruble weak will theoretically depend on if industrial and agricultural enterprises, i.e., tradable sectors, increase their ability to compete. The share of non-tradable sectors – construction, commerce, and services – which previously developed at a faster pace, will gradually decline. In this way, one of the effects of the ‘resource curse’ should weaken.
In practice, however, the industry teetered between stagnation and recession in early 2015, partly because of the increased prices of imported raw materials. In 2012-2013, imports accounted for an average of 9% of expenses to produce and sell goods. This metric was 60% for producers of tobacco products and audio and video equipment. Lastly, imports accounted for 30% of spending to produce machinery for agriculture and forestry, as well as home appliances; electronic parts and equipment for television, radio and communications; automobiles; motorcycles; and bicycles.
A ‘break-even exchange rate’ was also calculated for the manufacturing industry based on the assumption that if the ruble’s exchange rate falls, all of the industry’s profit would go towards compensating for the increased cost of imported materials. This exchange rate was 65 rubles/$1 under 2013 conditions. It might therefore be concluded that overall, the Russian manufacturing industry will benefit from the ruble’s devaluation only if there is a significant increase in the profitability of production compared with the pre-crisis level.
The speed with which the crisis stages are overcome is closely tied to the economic and institutional policy decisions that are made. Akindinova and Yasin suggest four possible scenarios.
The first in a so-called ‘inertial scenario,’ under which the authors posit that the crisis is fraught with a host of negative consequences. If the price of oil remains at $40-$60 a barrel, the Russian economy will face a sharp increase in budget constraints. Furthermore, the natural restructuring process has begun, which will face an investment insufficiency that might not be overcome under the inertial conditions.
If oil prices begin growing again, the continuance of the inertial scenario might seem comfortable at first glance, as an increase in oil prices to $80-$90 per barrel would cause people to expect a favourable long-term situation. But this might actually cause the economy to remain resource-based with investments remaining largely short-term in nature and pro-cyclical fiscal policies prevailing. Economic restructuring would be put off yet again, and there would be shorter growth periods for oil prices, the authors believe. In other words, whether oil prices are low or moderately high, the inertial scenario does not entail sustainable growth.
The experts believe the second scenario, which envisions mobilisation, is most likely. Under this scenario, society agrees with the idea that Russia should develop independent of the Western world. With this, the government will play an even larger role. The mobilisation scenario entails a concentration of domestic resources for investments, the establishment of industries to replace imports, and finally, an increase in the military component of the economy and budget. But an emphasis on phasing out of imports while foreign relations are restricted means the country will be on a course that simplifies the economy and supports ineffective producers. After short-term recovery, this scenario leads to a rapid exhaustion of resources, the disintegration of relations, and an initial refocusing of resources from consumption to state investments, and then from effective enterprises to ineffective through the increase of taxes and subsidising of certain projects. In other words, this scenario might entail a faster attempt to reach the dynamic seen in the 2000s within a short timeframe, but this will be followed by an exhaustion of resources and an even deeper recession or decline.
The authors call the third scenario a ‘breakthrough scenario,’ but they note that society’s unwillingness to accept liberal ideas makes fast, broad liberalization, as well as institutional reforms, impossible despite the fact that they are needed in order to overcome the investment crisis and continue modernizing.
Lastly, the fourth scenario involves developing gradually with the evolutionary development of a system of checks and balances. This system would balance the interests of the oil and gas power oligarchy and groups interested in creating uniform rules and guarantees for private investments. Only this way is it possible to move towards faster economic growth, or at least avoid long-term decline. This scenario – especially if a set of institutional reforms is carried out, both legal and political – would allow Russia to achieve growth rates seen in the U.S. and Europe within an acceptable timeframe.