Wednesday, December 17, 2014

The Root Of The Russian Economic Problems

The Financial Times provides us with the data that helps us to understand the basic problem in the Russian economy.  Oil and gas account for around 75% of Russia's exports and around 50% of the government's budget revenues.  The drop in the price of oil to $60 from over $100 not too long ago is a huge barrier to overcome.  It is no wonder that the central bank expects the economy to shrink by over 4% in 2015. 

The problems created by the energy price shock have also led to capital flight which has caused the ruble to decline in value.  The central bank increased interest rates to limit the capital flight but it is not clear that this will be sufficient.  The decline in the value of the ruble will make imports much more expensive and increase the risk of inflation.  Its hard to determine what might happen when large numbers of people expect a decline in the value of the ruble, and consumers anticipate price inflation. 

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