Russia could spiral into a deep recession starting in late 2015

The Russian economy suffers from three severe blows:

1. ever worsening structural policies
2. financial sanctions from the West
3. a falling oil price.

Observers tend to focus on one or the other of these three big blows, when discussing Russia’s economic growth in 2015, but they all come together. Furthermore, the falls in reserves and in the oil price are likely to have nonlinear effects, that is, the more they slump the greater the negative impact will be. Therefore, a prediction of a decline in Russia’s GDP of 1 percent next year sounds optimistic. Without making any exact forecast, conditions are in place for a downward spiral in the second half of 2015 with falling reserves, exchange rates, and oil prices, but rising inflation and interest rates. Then, a GDP fall of 4 to 6 percent during the second half of 2015 becomes quite possible, though not yet likely.

On September 30, Russia had a total external debt of $678 billion, while its international reserves appeared solid at $421 billion on November 14, but that is not quite true. Of this amount, $45 billion is held in gold, and $172 billion in the two sovereign wealth funds, the Reserve Fund and the National Wealth Fund. The Ministry of Finance controls those two funds, much of which is deposited in state banks or invested, so these funds are not liquid reserves. If we deduct gold and sovereign wealth funds, the official reserves shrink to $200 billion. In the last year, Russia’s international reserves have declined by $103 billion. In the coming year, they are likely to fall by another $100 billion, because Russia has to pay back about $150 billion a year, while its current account surplus is about $60 billion a year. When the market realizes that Russia’s reserves are running short, capital outflows will accelerate in anticipation of capital controls and the exchange rate will fall further.

SOURCE – Peterson Institute for International Economics

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