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Prince Amir Al Saud

Why is the Russian Economy Shrinking?

Why is the Russian Economy Shrinking?

 

Russia’s economy is in recession. The adverse market condition has led many to question whether the economy will collapse. Significantly, the government is trying to prevent this but to no avail. The factors that have led to its economic downturn are the fall of oil prices and devaluation of the ruble. This has led to high inflation rates. Furthermore, Russia has had to contend with sanctions preventing them from engaging in economic activity.

One of Russia’s main exports is oil, which had declined in price to half of what is a year ago. Previously, it was $100 a barrel. As such, this has negatively impacted their economy with the IMF predicting a macroeconomic contraction for 2015 at around 3%. Today the country is suffering its longest recession stemming from 2013. Its last recession was in 1997.

It is important to note how the sanctions have hurt Russia’s economy affecting the value of the ruble. It is estimated that the financial sanctions have affected Russia by as high as 50% coupled with the decline of oil prices. In this way, the ruble lost its value at around 30% paving the way for a hike in basic prices of goods. The price of oil is unlikely to increase soon compounding the problem of Russia in managing its economy. However, while some of the sanctions have eased, it has affected the state’s budget.

The country is unable to neither borrow nor privatize any of its assets. It has no other choice but to use their reserves but they do so sparingly since the sanctions have not been fully lifted. The government is careful of exhausting its reserves as it is expected that the sanctions would be in place for a long period. Furthermore, while many are expecting an increase in public spending, the government has slashed its budget. It has cut its spending in favor of social spending. In this way, this hampers their growth prospects with expected future cuts in the country’s military.

The decline of the ruble began in 2014 being the second highest in the world. It has rallied upwards recently but still far off its target. While many view this as a sign of economic stability, the country is still not out of trouble. Its recession market is still in place wherein stabilizing the ruble was due to using the country’s hard currency reserves. The Russian Central Bank has tried cash infusion to pump prime the economy but inflation rates are still high at 16%. The European Union has even predicted that the country will continue to contract by as much as 4.5% in 2015 with zero growth until 2016.

Furthermore, President Vladimir Putin has forced Russia’s oligarchs to help stabilize the ruble. They mainly control large areas of the Russian market and this significantly supported the currency rise. The action clearly shows how the government plays a major role in its economy rather than allowing the market to correct itself naturally. There is no laissez-faire approach in Russia.

The involvement of the government has shown no signs of abating wherein it has increased the poor demographic. The country now faces a decline of real income of at least 10% with an increase of mortgage defaults. This makes the people unable to buy their basic needs with food and utilities being most affected by the inflation.

However, if you ask the Russian people they do not blame their President for their economic woes. They place the blame on the sanctions imposed by the United States and European Union. Furthermore, they also blame Ukrainian fascists. In this way, they approve of the government’s meddling in economic affairs even if there is no sign of positive future growths for the country in the next two years. 

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