Causes and Consequences of Russia's Crisis

The State of the Russian Economy

  • The Ruble has lost about half its value this year, dipping to a low point of 80:1 trading value on the dollar
  • The Central Bank of Russia raised interest rates to a staggering 17% on December 16th to try and stop the Ruble’s fall.
  • Capital flight in 2014 will be greater than $100 billion, nearly double the rate that Russia is used to. Russian elite have lost nearly $50 billion dollars in wealth as a result.

 

If it Walks and Talks Like a Crisis…

Perhaps the most volatile industrialized economy this year was Russia’s. Hit by a perfect storm of sanctions, falling energy prices, and a rapidly devaluing currency, the economy could be well on its way to being in a state of recession - if not already. Experts have their own idea on the primary cause of the crisis. Here, Leksika explores the different schools of thought and discusses the crisis’ implications for Russian policy projects over the next several months.

 

Sanctions: Everyone’s Favorite, but are They Working?

A significant portion of analysts have attributed Western sanctions to the stagnation of Russian growth. The motivation and mechanics of Western sanctions may be debated, but the real effect of sanctions on Russian capital and industry is a more productive conversation. Perhaps the strongest effect sanctions have had on the Russian economy is capital flight. Russian firms who are not sanctioned must seek alternative banking and finance options to prevent their assets from being frozen. Those who cannot seek foreign financing are stonewalled into less-than-lucrative options from domestic financiers. While sanctions alone caused the crisis, they have certainly exacerbated its effect and caused the general unnerving of Russian businessmen.

 

Oil Prices: The Real Cause of the Crisis?

The strongest catalyst of Russia's current economic woes is the dramatic drop in oil prices. Many fail to realize just how dependent the Russian economy is on the global energy market.  Putin-era economic growth has been primarily thanks to the energy industry. The Russian economy is a 21st century one-trick-pony. High oil prices have allowed Russia to build a reserve upwards of $90 billion. Such a fund could easily pay for massive pork projects like the Winter Olympics in Sochi or infrastructure development in the recently annexed Crimean peninsula.

However, these adventurous Russian projects are based on an expensive oil trade network. With the introduction of a massive oil exporting regime from US shale reserves, and the subsequent price war from OPEC, the world oil price has plummeted this year, throwing Russia into deficit spending. Such is the folly of predicating expansionary economic and foreign policies on such a volatile industry, and the degree to which Russia has relied on energy exports have left their economy vulnerable to crises similar to the one they currently face.

 

Implications: A Russian Policy Portfolio in Flux

While the outcome is uncertain, few will disagree with the notion that the economic crisis is having a profound effect on the projection and perceptions of Russian power. In a recent blog post for the Peterson Institute of International Economics, Anders Aslund detailed how the economic crisis is communicated to the Russian populace. Putin will acknowledge the poor numbers but is still terse when discussing its effect. Even though Putin acknowledged that the crisis could affect Russia for years to come, his unwillingness to fully mitigate the issue shows that even a self-evident economic crisis is not enough to catalyze a change in domestic or foreign policies -- at least not in the immediate future, which will only serve to perpetuate the crisis, and Russian aggression abroad. This government especially since the Kremlin controls a substantial part of Russian media and blames the crisis on “external forces.”

There are other analysts in the media who see Putin’s disregard of the crisis as having the potential to temper Russian aggression abroad. If the key players in Putin’s power-vertical are losing money, they are likely to recommend a more cooperative approach, especially in the face of codified US sanctions, and the potential for the EU to do the same. Some even go so far as to say that the crisis could bring Russia to the table on more substantive discussions to resolve the Ukraine crisis.

Regardless of which analysis is correct, Russian foreign policy machine is dependent on the stability of the power-vertical, and if Oligarchs and Putin’s Siloviki are more cautious, then Russian foreign policy will follow as such. However, the economic implications for Russia’s elite are not so dire. Despite the poor economic performance, Russian income inequality has been exacerbated. If the Russian consumer has any more hardship (shelves in some stores have emptied as Russians try to spend their money before it loses any more value), or if the Kremlin is forced to introduce capital controls to try and prevent a recession, then the world will know the level of economic crisis it takes to cause Vladimir Putin to change course on his policies.