When the nation’s currency falls, the balance sheets of local businesses — which have assets in rubles (or pesos or rupiah) but debts in dollars or euros — implode. This, in turn, inflicts severe damage on the domestic economy, undermining confidence and depressing the currency even more.
So what does this have to do with Putin? The answer is crony capitalism. Russia has been running trade surpluses (which should make the ruble appreciate), but this current account surplus has been offset with huge foreign borrowing by the private sector.
...walking around Mayfair in London, or (to a lesser extent) Manhattan’s Upper East Side, especially in the evening, and observing the long rows of luxury residences with no lights on — residences owned, as the line goes, by Chinese princelings, Middle Eastern sheikhs, and Russian oligarchs. Basically, Russia’s elite has been accumulating assets outside the country — luxury real estate is only the most visible example — and the flip side of that accumulation has been rising debt at home.
Russia's economy has taken a hit from multiple fronts and seen a drop in their currency as a result. Their actions relating to Ukraine has caused other countries to impose trade bands and made importation of Russian goods illegal. For an economy that relies on the oil trade, embargoes combined with lower oil pricing has dealt a hefty blow to Russia.
ReplyDeleteAs mentioned in Paul's article, many Russian businesses have debt denominated in outside currencies. The more the ruble decreases in value, the more those external denominated debts become cumbersome to Russian citizens. In an attempt to reign in a stronger home economy, Putin has reached out to the wealthy and attempted to encourage them to keep assets based at home. (Piper,2015) Former Mrs. Russia and Mrs. Globe Alisa Krylova spoke with Reuters about how in recent months other wealthy citizens have started hiding their wealth and taken a less flashy approach. Instead of opting for luxury weekend trips to the Alps or abroad, Kylova has started spending more time in Russia and spent the New Years visiting museums and Red Square.
Piper, E. (2015). Russia's rich forego some luxuries but still back Putin. Reuters. Retrieved from: http://www.reuters.com/article/2015/03/29/us-russia-crisis-rich-idUSKBN0MP07R20150329
A lot of Russia’s problems continue to go back to the price of oil. While the price of oil has dropped in other countries, Russian currency has depreciated. What Russia has done with oil is similar to what Americans did with housing. Russia assumed that the price of oil would stay steady or even increase. Because of that, many upper-class Russians were able to bet against the price of oil in accumulating foreign assets and debts. One of the reasons the price of oil has declined is because there was an increase in suppliers (including an increase of fracking in North America) that helped bring the oil market back to equilibrium. Once this happened, Russia could no longer run its economy exclusively on the price of oil. It will be very interesting to see what happens to their economy over the next couple of years.
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ReplyDeleteRussia’s budget for 2016, which was approved at the end of December, was based on an average oil price of $50 per barrel and a deficit of 3 percent; but officials warn that the January fall in oil prices means this will need to be significantly revised.
ReplyDeleteThere is little detail on where spending cuts will fall, but the Kremlin will be careful to avoid provoking anger among ordinary Russians already hit hard by a sharp fall in real incomes. Both poverty and unemployment have risen steadily in recent months.
One possible extra source of revenue is a sell-off of stakes in state-owned companies. The process of privatization plays an important role in changing the structures of the Russian economy and stimulating an inflow of private
investment. Privatization has often been discussed over the past decade, but there have been few successful major sales
Low oil prices actually increase the likelihood of privatization in Russia despite worsening market conditions.
Amos,Howard (2016) http://www.ibtimes.com/russian-officials-scramble-solutions-low-oil-price-economic-problems-bite-2290381