The outgoing year of 2015 was not the easiest for the Russian economy as a whole and the ruble in particular. Oil prices continue to trend toward lows, economic sanctions against Russia imposed by the US and EU have not only not been lifted but have even been reinforced, and the geopolitical situation remains complicated. We summarize the year and evaluate the future prospects of the ruble and the Russian economy.
Where Did the ‘Floating’ Ruble Lead?
On November 10, 2014, just over a year ago, the Central Bank of Russia made a decision to switch to a floating exchange rate for the ruble, which led to many headlines such as ‘The Ruble Was Sent into Free Sailing.’
‘Floating’ for a year has led the ruble to weaken against the dollar by almost 32%, which is the third-worst result in the ranking of currencies of emerging markets. The ruble fell more than only the Brazilian real and the Colombian peso in 2015.
Certainly, the decision of the Central Bank of Russia was justified from the point of view of supporting the ruble and slowing down the depletion of gold and foreign exchange reserves. For consumers, this became a negative, and quite significant; for oil exporting companies, it was a significant positive.
So, how did the floating exchange rate of the ruble affect the Russian economy in 2015?
1 Consequence: Inflation in Russia
A drop in the ruble against the dollar of more than 30% caused inflation to rise to its highest level in 13 years. In the fight against inflation, the Central Bank of Russia raised the key rate to 17% in December last year. At present, it has been reduced to 11%, but inflation still exceeds the Central Bank’s target by almost four times.
Fig. 1. Inflation Level in Russia.2 Consequence: Level of Poverty Among Russians
In full accordance with economic laws, the rise in inflation negatively affected the purchasing power of Russians. A decline in income became so rapid that many citizens ended up below the poverty line. According to forecasts by the World Bank, the level of poverty in Russia will show a significant increase for the first time since the financial crisis at the end of the 1990s.
Fig. 2. Level of Poverty in Russia.3 Consequence: Reduction in Wages
As paradoxical as it may sound, the Russian labor market is dealing with the crisis by reducing working hours and wages, not employees. On average, the salary of a Russian citizen followed the price of oil, which is the key export item of Russia, and is equivalent to the cost of 10 barrels of oil.
Fig. 3. Nominal Wages in Russia.4 Consequence: Saving Orientation
The decline in income in the wrong direction affected consumer habits and moods. The ban on imported products, which was supposed to stimulate domestic production, limited the choice of quality goods, and the prices of Russian alternatives were often higher than foreign ones with worse quality.
Fig. 4. Consumer Survey Results.5 Consequence: Income from Oil Exports
Due to the peculiarities of the Russian tax system, as well as the receipt of income in foreign currency and expenses in rubles, Russian oil exporters benefited from the weakening of the ruble. Despite the drop in oil prices, the profit margin of the largest exporters remained unchanged.
Currently, there is a government project proposing to introduce an additional profit tax on oil and gas companies in 2016, which would make the low ruble value less comfortable for oil and gas exporters.
Fig. 5. Profit of Russian Oil Exporters.What Prospects Does the Ruble and the Russian Economy Have?
In the current situation, much depends on the geopolitical climate, in particular, the strengthening or weakening of pressure on Russia through economic sanctions, as well as Russia’s countermeasures. Leaving geopolitics to specialized experts, let’s try to assess the economic prospects.
1: End of the Recession in Russia
The Minister of Economic Development of Russia, Alexei Ulyukaev, announced the end of recession in the Russian economy and expectations of economic growth. The basis for this is the monthly dynamics of GDP prepared by the Ministry of Economic Development. However, monthly data are purely estimative information, not corresponding to international accounting rules, which operate with quarterly and annual data.
According to analysts’ estimates, the dynamics of the Russian GDP in the next five years will fluctuate in a narrow corridor between a 0.5% decline and a 1.5% increase after an average annual growth of 4.6% during the period from 2000 to 2014. In 2016, the Russian economy will not grow, and in 2017, it will add about 1%.
The main risk identified by experts of the ForTrader magazine is the conservation of the economic downturn. The lack of efforts to eliminate fundamental causes: imbalance between the raw material and processing sectors
FAQ
What was the impact of the floating ruble on inflation in 2015?
The ruble’s 32% depreciation against the dollar led to high inflation, reaching a 13-year peak. The Central Bank raised the key rate to 17% to combat it.
How did the ruble’s weakness affect Russian wages?
Russian wages followed the price of oil, which dropped significantly. This led to reduced incomes and increased poverty levels among citizens.
What were the economic prospects for Russia in 2016?
Economic growth was expected to be minimal, with forecasts predicting no growth in 2016 and about 1% growth in 2017, depending on geopolitical factors and sanctions.
