Russia could have depression, currency crisis and distressed sale of assets in 2015

Anders Aslund of the Peterson Institute for International Economics predicts a 10% decline in Russia’s 2015 GDP.

Since November 2014, it has been obvious that the Russian economy would shrink sharply this year, and the January statistics indicate a serious decline has started. The Russian Ministry of Economic Development has forecast a decline of GDP of 3 percent this year, while the Central Bank of Russia predicts a decline of 4.5 to 5 percent at an oil price of $50 per barrel. These forecasts appear overly optimistic. An abrupt fall of 10 percent seems more likely, because key Russian indicators look worse than in 2009, when Russia’s GDP contracted by 8 percent.

Another proposed definition of depression includes two general rules:

a decline in real GDP exceeding 10%, or
a recession lasting 2 or more years.

Worldwide GDP fell by 15% from 1929 to 1932. Between 1929 and 1933, the gross national product of the United States decreased by 33% while the rate of unemployment increased to 25%.

In July 2014, the United States and the European Union imposed serious financial sanctions on Russia. In parallel, the global oil price started falling and with it the ruble. As if these factors were not bad enough, the Kremlin is pursuing an economic policy that aggravates the decline.

Tightened Western financial regulations have made the Western financial sanctions more severe than expected. The official Russian currency reserves are still large at $368 billion on February 13, but they have fallen by $110 billion since July 2014. However, the situation is considerably worse. The Ministry of Finance controls two sovereign wealth funds, the Reserve Fund with $88 billion and the National Welfare Fund with $78 billion on February 1. These funds will be used for bailouts of companies and infrastructure investments and are not real international reserves. The government plans to spend half of its Reserve Fund this year. In addition, the Central Bank of Russia holds gold worth $49 billion.

The liquid international reserves held by the Central Bank of Russia have declined from $257 billion on July 1 to $153 billion on February 13. Considering that Russia’s foreign indebtedness is almost $600 billion and the expected currency outflow is about $100 billion this year, Russia’s reserve situation is approaching a critical limit. At present, Russia loses more than $10 billion a month, which means that a real reserve crisis will erupt in the third quarter.

Even the official russian reserve reports from the Russian Central bank have Russia on pace to have closer to $200 billion by the end of the year.

Will there be an emergency sale of oil and gas fields to China ?
Russian officials are saying there would now be “no political obstacles” to allowing Chinese stockholders to hold more than 50 percent of large oil and gas fields.

SOURCES – Bloomberg, Wikipedia, Peterson Institute for International Economics