russian economy 2008-2014

RUSSIAN FEDERATIONImpact of exogenous shocks on natural resource driven economiesAnalysis from 2008 to 2014

Russia (2014)

• Surface area: 17,098,242 km² (1st)

• Population: 143,8 millions (9th)

• GDP (US$): 1.861 trillions (6th)

• GDP per capita (US$): 12,925

• Gini: 0.42 (83rd)

• Currency: Russian Ruble (RUB)

10/07/2015 Russian Federation – Economic Environment 2

History• Perestroika (1988-91)

• Gorbachev first modest steps to reform (allowing private-sector activity)

• “Katastroika” (1991-1998)• Yeltsin’s radical reforms to introduce a market economy• 90% of price controls lifted• 70% of economy transferred to private ownership

• Vast wealth transfer to oligarchs• 30% of population below poverty line• Real wage decrease by 38%• Life expectancy halved while crime rates doubled

Russian Federation – Economic Environment 310/07/2015

History II• Since Putin’s access to power in 1999 Russia’s GDP has

doubled• Population below poverty line decreased from 35% to

11% (2003-2013)• Living standards of average Russian doubled


Economy: Natural resources• Natural resources contribute 19% to GDP• Value of sub-soil wealth: $75 trillion (Largest on earth)• Federal budget revenues from energy sector: 50%


68%

11%

17%

4%

Russian exports 2013 in %

Oil & GasMetals & precious metalsManufactured goodsOther

Economy: Geography


Economy: Structural flaws• State ownership made comeback under Putin (50% of

GDP in 2012)

• SME’s account for only 20% of GDP and employment

• Global rankings:• Index of Economic Freedom 2015: 143rd of 178 (OECD)• Doing Business 2013: 62nd of 185 (WB)• Corruption Perception Index 2014: 136 of 175 (Transparency INT.)

• Cost of corruption estimated at 50% of GDP (!)


Economy: Productivity


Economy: Inequality


• Growing inequality• Top 10% control 84% of total household wealth (Credit Suisse)• 110 Russians control 35% of total household wealth (Credit Suisse)

Economy: Lack of innovation• Russia’s scientific publications are 4% of the US’

• High technology exports 8,3% compared to EU’s 15,3%


R&D spending as % of GDP in 2011 International patents in 2012

Shock 1: Ukraine crisis• Nov. 2013: Yanukovych suspended implementation of an

association agreement with the European Union• 21 Feb. 2014: Month of protests led to Yanukovych

fleeing the country and Russophone regions in East and South to revolt

• 26 Feb 2014: “Pro-russian gunmen” take over Crimea• Mar. 2014: War in Donbass region


Shock 1: Ukraine crisis II• International community decided an array of sanctions to

hit the Russian economy:• Asset freezing against high-profile businessmen & government

officials• Sanctions against Russia’s financial sector• Sanctions against Russia’s defense & aerospace sectors• Bans of exports of oil industry technology


Shock 2: Drop in oil price• Slight drop in demand due

to weak economies (EU, China, etc.)

• OPEC not reducing output• Output increase by Russia

despite sanctions • Output increase in US due to

shale oil expansion


Inflation

• Inflation rise is continued after the shocks

• Why?


Exchange rate plummets• Ruble loses 46% of its value vs. US Dollar

• Correlation with dramatic decrease in oil price• Loss of confidence in the ruble due to sanctions

• Massive capital outflows

• Dollarization of savings

Increase in prices of imports… Countermeasures?Russian Federation – Economic Environment 1510/07/2015

Countermeasures

• Restrictive monetary policy• Quick increase of interest rate•Emergency lending facilities for banks• Only partially effective because causes were non-monetary


Fiscal countermeasures• Recapitalization of unstable banking system (RUB 1 trillion or 1,4%

of GDP)

• Ban on imports of food from western countries (food inflation at 20%)

• Infrastructure projects for RUB 900 billion or 1,2% of GDP


Real GDP growth

• Real GDP growth decreased from 1,3% in 2013 to 0,6% in 2014

• Shocks do not seem to have affected GDP too much

• Why?


Trade

• Government banned food imports from western countries

• Decrease in imports was larger than decrease in exports


2008 2009 2010 2011 2012 2013 2014-40

-30

-20

-10

0

10

20

30

Growth in Imports/Exports % of GDP

Imports Exports

Current Account Balance

• Slight improvement in CA balance

• Goods more than make up for outflows in every other account type

• Investments income outflow dropped because of sanctions

• Suitable long-term situation?


Unemployment

• Unemployment actually dropped further

• Structural feature of Russia’s labour market: quick adjustment of wages

• Consumption suffered due to loss of purchase power

2008 2009 2010 2011 2012 2013 20140

1

2

3

4

5

6

7

8

9

AVG BICAVG G7RUSSIA


Government budget

• 50% of budget depending on energy revenues

• Government budget does not give the full picture of the damage done to the state

• Sovereign wealth fund dropped by 0,1% GDP

08 09 10 11 12 13 14

-8

-6

-4

-2

0

2

4

6 5

-6

-3

20

-1 -1

Government Surplus/deficit in % of GDP


Government debt

• Increase in 2014

• Low levels of debt

• Debt does not seem to pose a long term problem

2008 2009 2010 2011 2012 2013 20140

20

40

60

80

100

120

140

56 58 56 55 56 56 57

89101 107 111 115 117 118

8 11 11 12 13 14 18

Debt-to-GDP ratio in %

AVG BICAVG G7RUSSIA


Investment

• Sharp decline in 2014 of FDI (59% from 2013 to 2014)

• Crucial for the natural resources since most of the technology comes from abroad

• Effect of sanctions

2008 2009 2010 2011 2012 2013 20140%

1%

2%

3%

4%

5%

FDI inflows in % of GDP


Long-term effects?• Natural resource prices are fixed for longer periods of time

• Effect of import bans and ruble depreciation will become more severe:

• Continuous rise in inflation• Loss of purchase power

• Drop in investor confidence (crucial for investment in natural resources)

• No access to external finance due to sanctions

• Shaking banking sector

• Political tensions due to loss in welfare and lifestyle?


Conclusion


russian economy 2008-2014

Economy & Finance