Russia

Russia: surviving the crisis

Russia’s economic performance has been very poor after the drop in oil prices in 2015 that led to a deep recession. The EPI score was close to 69%, or a D level, in 2015, the lowest level since the 2009 crisis, but is projected to improve to 80.4%, or a D+ level, mainly because of lower inflation.

A large ruble devaluation pushed inflation into double digits. For an economy with two thirds of exports and half of the government budget revenues coming from oil and gas, the latest downturn in the global oil market means Russia’s recession may stretch into next year for the longest slump in two decades. The western sanctions on Russia related to the crisis in Ukraine have also played a role in amplifying the negative effects of lower oil prices on the Russian economy by limiting the ability of Russian companies to borrow money on the western financial markets.

GDP fell by about 4% in 2015, driven by a large drop in exports in dollar terms and a deep recession in the industrial sector, but is projected to fall further in 2016. The ruble lost most half of its value, after the Central Bank of Russia stopped selling its reserves on the market to protect the currency. A large ruble devaluation increased the prices of imported good, pushing inflation to almost 16% in 2015, up from about 8% in 2014. The government has already cut budget outlays and dipped into one of its sovereign wealth funds, the Reserve Fund, to help cover the shortfall. Still, with half of the budget dependent on oil, budget deficit is projected to increase to almost 6% of GDP in 2015 and 3.9% in 2016, up from only 1.2% a year ago. The unemployment level increased only slightly to 6.5% in 2016, up from 6% in 2015, driven by the recession in the economy. Still, demographic factors (like lack of labor force) allowed it to keep its unemployment low.

With oil prices at below $50 dollars per barrel, the Russian economy is likely to go through a painful adjustment in the next few years.  The 5-Minute Economist projects Russia’s EPI score to improve in the medium term from D level currently to C+/B by 2020, mainly driven GDP recovery after the recession and slowdown in inflation, if the ruble and oil prices stabilize.