Russian financial crisis (2014–present)

The ongoing financial crisis in Russia is the result of the collapse of the Russian ruble beginning in the second half of 2014.^{[1][2][3][4][5][6]} A decline in confidence in the Russian economy caused investors to sell off their Russian assets, which led to a decline in the value of the Russian ruble and sparked fears of a Russian financial crisis. The lack of confidence in the Russian economy stemmed from at least two major sources. The first is the fall in the price of oil in 2014. Crude oil, a major export of Russia, declined in price by nearly 50% between its yearly high in June 2014 and 16 December 2014. The second is the result of international economic sanctions imposed on Russia following Russia's annexation of Crimea and the Russian military intervention in Ukraine.^[1][7]

The crisis has affected the Russian economy, both consumers and companies, and regional financial markets, as well as Putin's ambitions regarding the Eurasian Economic Union. The Russian stock market in particular has experienced large declines, with a 30% drop in the RTS Index from the beginning of December through 16 December 2014.

Russian monetary policy

Decline in the Russian ruble

Since the Great Recession, yields on U.S. treasuries and other low-risk assets have decreased due primarily to the liquidity-trap and also unconventional stimulative measures by central banks, such as ZIRP and quantitative easing. This has led investor patterns to become what is known as "reach for yield" with emerging market debt: emerging market debt is being bought by developed economy investors due to investors seeking greater interest on their holdings of debt. This led to increased issuance of debt by Russian companies in foreign currency-denominated terms, with $502 billion in foreign-currency denominated debt as of June 2014, up from $325 billion at the end of 2007.^{[8][9][10][11][12]}

The recent decline in the Russian ruble has increased the costs for Russian companies to make interest payments on debt issued in U.S. dollar or other foreign currencies that have strengthened against the ruble; thus it costs Russian companies more of their ruble-denominated revenue to repay their debt holders in dollars or other foreign currencies.^[13]

Official exchange rates RUB/USD and RUB/EUR set by the Bank of Russia^[14]

United States dollar
Euro

Central Bank intervention

On 15 December 2014, Russia had foreign currency reserves worth around $400 billion, the sixth-highest total in the world.^[15] These currency reserves gave Russia the ability to prop up the ruble.^[15] On 15 December, the Central Bank of Russia spent almost $2 billion in an attempt to strengthen the declining ruble.^[16][17]

Just before 1 a.m. local time on 16 December 2014, the Central Bank of Russia increased its key interest rate from 10.5% to 17% in an attempt to slow or stop the decline of the ruble.^[18][19] It was the sixth increase in interest rates by the Central Bank of Russia during 2014.^[18]

Even after the Central Bank's intervention early in the morning, the ruble declined further. At one point later that morning, it took 79 Russian rubles to purchase one U.S. dollar, a steep decline from the rate of 33 rubles to the dollar in January 2014.^[19] The ruble strengthened from its lows on 16 December after the Russian Central Bank said it would not implement capital controls.^[20]

On 22 December, Russia's central bank lent $530 million to Trust Bank, which became the first bank to accept a government bailout during the crisis.^[21]

On 12 January 2015, the central bank's 2014 data of net currency interventions was reported by Interfax, a Russian news agency, to have been $76.13 billion and €5.41 billion, including $11.9 billion in December 2014.^[22]

In 2015, the Central Bank decreased interest rates numerous times. On 30 January, the Bank cut down the interest rate from 17% to 15%.^[23] On 13 March, the rate was lowered the second time this year to 14%.^[24] On 30 April, the rate was lowered the third time to 12.5%. Moreover, inflation slowed to 16.5% by 26 April, a decrease from approximately 17% in March.^[25] On 15 June, the rate was lowered to 11.5%.^[26] On 31 July, the interest rate was lowered to 11%. Inflation rate as of 27 July was 15.8%, an increase from 15.3% in June, as a result of temporary tariff increase, said the Bank.^[27] The ruble fell against the dollar to at least US$61 and against the Euro to around €67.70.^[28]

State-owned agency TASS reported a loss of US$5.4 billion in the Bank's foreign reserves to US$369.2 billion on the week of 23–30 October.^[29][30]

Causes

Fall in oil prices

The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in December 2014.^[12][37][38] The drop in the oil prices was caused by a drop in the demand for oil across the world, as well as increased oil production in the United States.^[39] This fall in oil prices hit Russia hard, as roughly half of the Russian Federation's governmental revenue comes from the sale of oil and gas.^[38] Russia's economy suffers from Dutch disease, a term economists use to describe a situation in which a country focuses on developing its natural resources to the detriment of other economic activity.^[40] In 2014, Russia needed an oil price of $100 per barrel to have a balanced budget.^[41] As the price of oil falls, Russia continues to sell its oil at operational capacity, without the ability to dramatically increase oil production to compensate for the lower price, and thus due to the reduced profit from selling oil, the government has substantially lower income. Russia is not alone in feeling the ill effects of falling oil prices, as several other countries, including Venezuela, Nigeria, and Kazakhstan, also faced reduced revenues and economic activity.^[42]

In August 2015, oil prices fell to US$37 per barrel and then bounced to more than US$45 on 28 August.^[43]

Economic sanctions

Any international aid to Russia is considered unlikely as a result of the 2014–15 Russian military intervention in Ukraine.^[12][44] Officials in the U.S. government have also said, despite the financial crisis, that the United States and the European Union will not ease economic sanctions imposed on Russia due to Russia's annexation of Crimea and Russian assistance to separatists fighting Ukraine in the War in Donbass.^[7]

Economic sanctions have also contributed to the decline of the ruble since Russian companies have been prevented from rolling over debt, forcing companies to exchange their rubles for U.S. dollars or other foreign currencies on the open market to meet their interest payment obligations on their existing debt.^[45]

Other possible causes

Russian President Vladimir Putin has been criticized for running a kleptocracy, in which a small number of rent-seeking plutocrats drain the economy.^[46][47][48] Russia was ranked second in the world on The Economist's 2014 crony-capitalism index.^[46] Putin accused the Western nations of engineering the Russian economic crisis.^[49][50] He has also said, "Our (Western) partners have not stopped. They decided that they are winners, they are an empire now and the rest are vassals and they have to be driven into a corner."^[50]

Annual percentage growth rate of GDP of Russia, 2008–2014

Russia was already near a recession before the Crimean crisis, and Russia ranks low on the World Economic Forum's rankings of road quality, technological adaptation, and burden of government regulation.^[51] Russia's already-weak economy left it less able to withstand the challenges imposed by low oil prices and international sanctions.^[52] The Russian Central Bank's "erratic response" to the falling ruble has also been blamed for deepening the crisis.^[53]

Financial, economic, and social impact

Impact in Russia

Currency exchanger in Moscow. The majority of banks in Russia have tables only with four digits, while in December 2014 some banks set exchange rates that needed five-digit tables.^[54]

On 16 December 2014, the RTS Index, denominated in U.S. dollars, declined 12%, the most on any given day since the midst of the global financial crisis in November 2008, and the Micex index declined 8.1% at one point before ending the day higher. This increased the decline of RTS Index, up until 16 December, of nearly 30% during the month of December.^[55] In response to rising interest rates and bank runs, the interest rate on Russian three-month interbank loans rose to 28.3%, higher than at any point in 2008.^[56][57]

To get rid of the Russian rubles which were declining in value, many Russians have chosen to purchase durable goods, such as washing machines, televisions, furniture, and jewelry, and to change their pensions and savings from being in rubles to US dollars or euros.^[58][59] Several currency exchangers offered cash only at much greater exchange rates: USD up to 99.8 RUB (official rate was 61.15)^[60] and EUR up to 120–150 RUB (official rate was 76.15).^[61][62] Some foreign companies have halted their business activities in Russia, including Volvo car dealerships and the online stores of Apple and Steam, due to the high volatility and decline of the Russian ruble.^[59][63] Additionally, Ikea temporarily suspended sales of certain goods in Russia, in part due to the volatility and in part due to a lack of adequate supply, as numerous Russians bought Ikea furniture.^[56]

Many Western financial institutions, including Goldman Sachs, have started cutting the flow of cash to Russian companies since they have restricted some longer-term ruble-denominated repurchase agreements (repos). These actions are intended to protect the Western firms from the high volatility of the ruble. Repos had allowed Russian companies to exchange securities for cash with Western financial institutions, so the restrictions are likely to add pressure to the Russian financial system.^[64]

Russia may also be excluded from the MSCI Emerging Markets Index, composed of 26 countries' indices, if capital controls or currency controls are implemented by Russia, since such measures would make it more difficult for foreign entities to access Russian securities markets. Russia would be reclassified as a standalone market in that event.^[65]

20 December print edition of The Economist predicted that Russia would face the "lethal combination" of a major recession and high inflation in 2015.^[66] Others predicted that the crisis would spread to the banking sector.^[67] On the other hand, President Putin has argued that Russia was not in crisis, and that cheaper oil prices would lead to a global economic boom that would push up the price of oil, which would in turn help the Russian economy.^[68]

Yearly inflation in Russia since 2008

On the week of 15 December, the Russian reserves on gold and foreign currencies were reduced by "US$15.7 billion to below US$400 billion for the first time since August 2009 and down from [more than] $510 billion at the start of the year."^[69] Within 15–25 December, annual inflation has climbed to more than ten percent. Prices of goods, including beef and fish, rose forty to fifty percent within a few months before the end of the year due to Russia's ban on Western imports.^[69]

Car sales in Russia went down 12 percent from previous year, 2013. The largest Russian oil company Rosneft, whose large shares are owned by the British oil company BP, lost U.S. and European assets and 86 percent of profits in the third quarter 2014. Rosneft pinned the decline on falling oil prices and ruble devaluation.^[70]

The crisis threatened the continued existence of the Kontinental Hockey League, and several teams missed or delayed payments to their players.^[71]

Russian President Vladimir Putin ordered cabinet ministers to not take their day off on 2015 New Year's Day because of the crisis.^[72][49][50]

As of December 2014, prices of meat, fish, and grain were inflated as a result of ruble devaluation. Some businesses were closed down, especially in the far eastern region of Russia's Siberia due to future rising lease fees.^[73]

The state-owned gas company, Gazprom, lost 86 percent in the 2014 net income, dropping to PP 159 billion (US$3.1 billion), because of ruble devaluation, plunge on oil prices, Ukraine crisis, and rising impairment costs. Overall revenues of the year grew 6.4 percent to PP 5.59 trillion ($106.3 billion).^[74][75]

According to a September 2015 survey conducted by Nielsen Russia, 49% of around 1,000 sampled people had not visited a bar in 2015 mainly due to economic crisis; 46%, not a pub; 62%, not a nightclub. In comparison, according to a 2014 survey, 28% had not visited a bar in the previous year, 2014; 32%, not a pub; 45%, not a nightclub. Survey conductors concluded that rising prices in restaurants and bars had been factors to declining attendance in those places.^[76]

Demographic consequences

Calculations presented by a group of demographers from the Russian Presidential Academy of National Economy and Public Administration demonstrate that the crisis may have very serious demographic consequences (simultaneous growth of mortality and decline of fertility)^[77]

As of March 2015, officially, three million Russians more than the previous year live with less than PP 9,662 (US$169) monthly income, totalling to twenty-three million.^[78]

Global financial markets

The financial crisis in Russia has affected other global financial markets. U.S. financial markets declined, with the Dow Jones Industrial Average down nearly 3% in 3 business days, in part due to the Russian financial crisis.^[79] The crisis drew comparisons to the 1998 Russian financial crisis that affected global markets.^[80] Economist Olivier Blanchard of the IMF noted that the uncertainty caused by Russia's economic crisis could lead to greater worldwide risk aversion in a manner similar to the Financial crisis of 2007–08.^[21] However, the 2014 international sanctions on Russia decreased Russia's financial connections with the broader financial world, which in turn lowered the risk that an ailing Russian economy would affect the worldwide economy.^[80] Since 1998, Russia and many other countries have adopted a floating exchange rate, which could also help to prevent Russian financial woes from affecting the rest of the world.^[80]

Foreign exchange trading service FXCM said on 16 December it would restrict U.S. dollar-ruble trading starting 17 December, due to the volatility of the ruble. They also said that most Western banks have stopped reporting the exchange rate of the U.S. dollar for rubles (USD/RUB). Liquidity in the U.S. dollar-ruble market has also declined sharply.^[64]

Capital outflow from Russia, billions of USD

Financial institutions that hold relatively high amounts of Russian debt or other assets have been affected by the Russian financial crisis. The PIMCO Emerging Markets Bond Fund also had 21% of its holdings in Russian corporate and sovereign debt as of the end of September 2014, which has declined about 7.9% from about 16 November 2014 to 16 December 2014.^[81]

Companies from North America and Europe that heavily relied on Russian economy have been affected by the crisis. American car company Ford Motor Company experienced a 40-percent decline on car sales in January–November 2014, according to Association of European Businesses, and terminated "about 950 jobs at its Russia joint in April [2014]." German car company Volkswagen experienced a 20-percent decline in the same period. American oil company ExxonMobil alongside Rosneft were unable to continue an Arctic project after the discovery of oil there due to sanctions over the crises in the Ukraine. British oil company BP lost 17 percent of market shares. French energy company Total S.A. shelved joint shale exploration plans with Russian oil company Lukoil due to sanctions.^[70]

German engineering company Siemens lost 14 percent of Russian revenue in 2014. German sportswear company Adidas closed down stores and suspended development plans in Russia. Danish beer company Carlsberg Group lost more than 20 percent of Russian shares. American fast food company McDonald's lost twelve stores, which were closed down by Russian officials due to "sanitary violations". French food conglomerate Danone experienced loss of operating margins in the first half of 2014 due to rising milk prices.^[70]

In January 2015, ratings agency Standard & Poor's lowered Russia's credit rating to junk status and economic rating from BBB- to BB+.^[82] Moody's followed this decision in February 2015.^[83]

Impact on former Soviet states

The devaluation of the Russian ruble affected the currencies of many post-Soviet states,^[84] which are tied through trade and remittances by migrant workers in Russia.^[85] For many post-Soviet states, trade with Russia represents over 5% of their GDP.^[86]

In Armenia, the dram depreciated from being traded at around դր.410–15 against the dollar in late November to a record low of 575 to the dollar on 16 December 2014.^[87] By mid-December inflation reached 15% to 20%.^[88] Parliament Vice-Speaker admitted panic in the country.^[89] The dram recovered significantly and stabilized^[90] on 18–19 December to around 460–80. However, inflation remained high, reaching forty percent for some products.^[91] In the past twelve months as of August 2015, the dram was devalued 15 percent.^[92]

In Azerbaijan, low oil prices have battered its oil-dependent economy. However, it looks impervious to economic turmoil as the government has maintained in reserve a large stabilization fund which has kept the manat afloat against the dollar within its usual band. Most of the country's trade is done with Turkey.^[84] On 21 February 2015 the Central Bank of Azerbaijan devalued the manat by 33.5% to the dollar.^[93]

The Belarusian ruble plummeted to its weakest since 1998 by 15 December.^[94]

In Estonia, which abandoned the kroon on 31 December 2010 and adopted the euro on 1 January 2011,^[95][96] the economic growth forecast was cut from 3.6 percent to 2.0 percent in April 2014 due to sanctions on Russia.^[97] As of April 2014, 11 percent of Estonia's exports had gone to Russia, and 100 percent of their natural gas had been imported from Russia.^[97]

In Georgia, the lari had collapsed to its lowest level versus the dollar in more than a decade by 5 December.^[85] By 11 December the lari plunged from the pre-crisis average of 1.75 to the dollar to 1.92–1.98.^[98] Between August 2014 and March 2015, the lari was devalued twenty percent.^[99]

In Kazakhstan, the tenge was devalued 19–20 percent in February 2014, and nearly 40 percent in September 2015 ^[84][100] However, the more significant devaluation of the ruble is making Kazakh goods less affordable to Russian citizens which reduces sales and manufacturing growth.^[84]

In Kyrgyzstan, remittance rates had dropped to twenty-nine percent as of October 2014 for the first time since 2009.^[100] The Kyrgyzstani som was devalued 15 percent on 12 December.^[84] Some Kyrgyz migrants returned from Russia to Kyrgyzstan due to the crisis.^[101][102]

In Latvia, which abandoned the lats on 31 December 2013 and adopted the euro on 1 January 2014,^[103]

In Lithuania, before it abandoned the litas on 31 December 2014 and adopted the euro on 1 January 2015,^[104] the Litas endured some inflation.^[105]

In Moldova, the leu was devalued twenty-five percent as of February 2015. The central bank raised interest rates by five hundred basis points.^[106]

In Tajikistan, remittance rates dropped to 49 percent as of October 2014 for the first time since 2009.^[100] The somini was devalued 5.5 percent on 12 December.^[84]

In Turkmenistan, one of Russia's trading partners, the manat was devalued 19 percent in January 2015.^[92]

In Ukraine, the officials abandoned dollar auctions and raised interest rates to 19.5 percent in 2015.^[106] The hryvnia was devalued sixty percent against the dollar between August 2014 and March 2015.^[99]

In Uzbekistan, the som was devalued nine percent on 12 December.^[84] According to Daniil Kislov, who runs Fergana.ru, a central Asia news portal, "there are 2.4 million Uzbek migrants in Russia, and those are just the official figures.

Chart of currencies of former Soviet countries

Official USD exchange rates

Event	Date
		AMD	AZN	BYR	GEL	KZT	KGS	LTL[lower-alpha 1]	MDL	TJS	TMT	UAH	UZS
Start of Euromaidan	21 November 2013	403.82[108]	0.7844[109]	9,332.29[110]	1.6761[111]	152.74[112]	48.8687[113]	2.5622[114]	13.01[115]	4.772[116]	2.8555[117]	8.1978[118]	2,169.605[119]
Annexation of Crimea	18 March 2014	415.46[120]	0.7843[121]	9,842.75[122]	1.7242[123]	182.34[124]	54.4999[125]	2.4779[126]	13.385[127]	4.8001[128]	2.8550[129]	10.0238[130]	2,236.6599[131]
Ukraine-Russia Gazprom Cutoff	16 June 2014	411.09[132]	0.7843[121]	10,179.93[133]	1.7669[123]	183.13[134]	51.9848[125]	2.5439[135]	13.975[136]	4.9241[128]	2.8503[137]	11.9204[138]	2,320.1599[131]
Russian Central Bank intervention	16 December 2014	475.19[139]	0.7832[140]	10,948.51[141]	1.85[123]	184.04[142]	57.60[125]	2.7596[143]	15.465[144]	5.1301[128]	2.8503[145]	15.8500[146]	2,413.96[131]

See also

• Great Recession in Russia
• 1998 Russian financial crisis
• Eurasian Economic Union

Notes

References

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