Russia Faces an Economic Crisis

While Russia’s economy has been struggling for growth over the past five years, there are increasingly clear signs that the situation in Russia could become much worse in 2015 and beyond.  First, Russia’s economic output today is just 5.5% larger than it was in 2008.  This is due not only to the deep recession that Russia experienced in 2009, but also to the fact that since 2010, economic growth rates in Russia have continuously trended downwards and are near 0% as of late 2014.  Second, the Russian economy’s dependence upon natural resource exports was long seen as a major threat to the long-term health of the Russian economy and the sharp fall in natural resource prices this year is having a devastating impact in Russia.

Russia’s economy has suffered two major setbacks in 2014.  First, Russia’s intervention in the crisis in Ukraine and its annexation of Crimea led to economic sanctions being placed on Russia by most Western economies, cutting off vital trade and investment connections.  Moreover, these sanctions led to a sharp fall in investor confidence in Russia and a surge in capital flight from Russia that has continued in late 2014.  Alone, these sanctions were not enough to push Russia into a recession as the Russian economy managed to record positive, if anemic, growth rates over the first three quarters of 2014.  However, a second, and much more serious, blow was dealt to the Russian economy when oil prices fell by more than 40% in the second half of 2014.  Given the fact that Russia needed increasingly higher oil prices to boost economic growth rates, this sharp decline in oil prices is likely to push Russia into a deep recession.

These two factors, international sanctions and falling oil prices, will determine how bad 2015’s recession in Russia will be.  For example, if oil prices average around $75 a barrel in 2015, than the Russian economy will likely contract by 0.9% next year.  However, if oil prices average just $65 a barrel next year, which is increasingly likely, then the Russian economy will shrink by an estimated 2.1% next year.  As oil prices are unlikely to rise significantly in 2015, it appears that there is no way Russia can avoid falling into a recession.  Moreover, the potential for the conflict in eastern Ukraine to intensify again remains very high and this could result in additional economic sanctions against Russia.  Altogether, 2015 is gearing up to be a difficult year for Russia’s economy, hence President Vladimir Putin’s recent warning to the Russian people that they should prepare for hard times in the coming year.