WASHINGTON, December 26, 2014 – The Russian economy, already in a slump, will enter a sharp recession next year, accompanied by double-digit inflation.
This is according to Russian government ministers, who blame Western sanctions against Russia over the annexation of Crimea and the plummeting price of oil. The sanctions have blocked foreign investment in the Russian economy, while the fall in oil prices has devastated Russia’s export revenues, putting strong downward pressure on the ruble.
The Russian government responded to the ruble collapse with a seven-point hike to the interest rate, but after a brief rally, the ruble continued its downward slide. Finance Minister Anton Siluanov said on Friday that if oil prices remain at $60 a barrel, the economy will shrink by 4 percent in 2015.
Moves by Saudi Arabia and American oil producers almost guarantee that oil prices will remain low for most of 2015. Saudi producers are profitable at prices far lower than the current market price, with production costs of about $4 per barrel, while American producers are likely to continue current production levels at any price above $60. New efficiencies in fracking technology have reduced recovery costs to $40 per barrel in some fields, and it is likely to fall further.
Russia’s government will run deficits as long as oil remains below $70 a barrel, and earlier budgets were predicated on oil that was selling above $90.
Russian Economy Minister Alexei Ulyukaev announced on Friday an expected ruble inflation rate of 10 percent in 2015. Russian consumers have been buying dollars and euros as quickly as they can in order to preserve the value of their savings. After the collapse of the USSR, they saw their ruble savings wiped out by hyperinflation. A financial crisis in 1998 resulted in another ruble crisis. After several years of relative ruble stability, ruble accounts in Russian banks are a rapidly deteriorating asset.
The Russian government has stepped in to prop up banks, and has decided to pump 250 billion rubles – about $5 billion at current exchange rates – into the country’s second largest bank, VTB. Gazprombank will receive 70 billion rubles.
In addition, the government is providing $2.4 billion in loans to Trust Bank, a mid-sized bank that is the first to fail under the ruble collapse.
Russia has been spending its foreign exchange reserves in attempts to prop up the ruble. Reserves of foreign currencies and gold are at their lowest level since 2009, falling to below $400 billion from $510 billion a year ago.