Russia appears to be falling into an economic crisis far more quickly than most had expected. However, a currency crisis is just the beginning of a bigger crisis as they run out of reserves and have high inflation.
The Central bank of Russia (CBR) has said that it expects Russian GDP to fall by as much as 4.7pc in 2015 if oil remains at the $60 a barrel level. Morgan Stanley said the economy will shrink at a rate of 6pc if crude drops to $50.
Late on Monday the CBR announced that it was increasing its key rate by 6.5 percentage points to 17%. The emergency move came as a monumental decline in oil prices and continued uncertainty over Ukraine has led the ruble to fall by more than 50% over the course of the year.
The currency’s slide has reflected a huge loss of confidence in the Russia economy. The state is heavily dependent on oil – oil and gas account for 67% of exports, and 50% of government revenues.
The move came just a week after the CBR raised its rates by one percentage point, having thrown more than $80bn of currency reserves at financial markets in an attempt to shore up the ruble this year.
The ruble’s collapse – the most severe since the 1998 currency crisis – has led many analysts to draw comparison. “Similarities with 1998 also included long lines in front of ATMs and bank branches as people tried to purchase foreign currencies, as well as the looming spectre of capital controls as the Russian authorities attempted to counter increasing capital flight”, Ms Kalen added.
As the rouble has slumped, the cost of importing Russian goods has risen. The CBR now expects that inflation will rise to 10% by the end of 2014.
Possible Impacts of a Russia economic collapse
Germany: Europe’s largest economy is most exposed to Russia. Last year, Germany’s trade relationship with Russia was worth more than €76 billion ($95.4 billion).
Rest of Europe: Russia buys plenty of goods from other European countries.
Energy, car companies and banks will also get hurt.
SOURCE – Google, UK Telegraph, CNN
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