Russia is heading for recession

By on December 3, 2014

The aggressive eastern giant is suffering from an ongoing fall in oil prices that has caused its currency to drop by the largest margin since 1998. Russia’s economy is not in a good way. Under the burden of western sanctions and at the mercy of oil prices, its government has finally begun to acknowledge it is likely to head into recession next year. It had previously expected growth of 1.2% in 2014 but today its economy ministry said it expects contraction of 0.8%. This follows a record slide in the rouble, which fell around 9% against the dollar yesterday before rallying, probably thanks to help from Russia’s central bank. The currency has been sliding lately because of a decline in oil prices and yesterday all hell broke loose when Brent Crude fell to a five year low of $67.50 a barrel. Oil and gas account for two thirds of Russian exports and half its government revenues, so it’s in quite a pickle. It had hoped Opec would decide to lower production outputs to stabilise prices, but that was quashed last week when the cartel’s conference voted last week to keep production targets at 300 million barrels a day. This isn’t likely to change as Saudi Arabia, Opec’s largest producer, said yesterday it was content with numbers remaining the same (the logic being cheap oil prices will make American shale gas too expensive to extract). The oil situation is exacerbated by western sanctions that are limiting Russia’s ability to do business with Europe. “We now assume that sanctions will remain in place throughout the whole of 2015,” said Deputy Economy Minister Alexei Vedev, whose ministry had

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previously expected sanctions to be lifted by summer. “This for us means closed capital markets for the majority of Russian companies and banks, as well as unfavourable conditions for investment – uncertainty and a lack of security.” The fraught financial picture raises the worrying prospect of capital controls, although Russian Premier Dmitri Medvedev has repeatedly ruled this out. The government expects outflows to reach R1.3 trillion this year, up from previous estimates of R1.1 trillion. “This has become disorderly. There are no real buyers of the rouble. We know that voices close to president Vladimir Putin want capital controls, and we cannot rule this out,” Lars Christensen, Chief Analyst at Danske Bank, told the Telegraph. For the sake of Russia’s economy, if not its political power, a thawing of relations with the West and a stabilising of oil prices can’t come quickly enough. Western leaders may be pleased to see the pressure ratcheting up on Putin, but businesses with interests in Russia won’t be quite so thrilled.

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