It could be worse than the financial crisisby Shweta Singh / March 20, 2015 / Leave a comment
Russia faces a perfect storm. Oil is the country’s key growth driver and the price has collapsed. Geopolitical risks abound and there are huge risks to Russia’s external funding which is already under pressure from a stronger US dollar and potentially higher US interest rates.
The economic dislocations in Russia will be severe and will likely surpass those felt during the 2008 financial crisis. If there is no meaningful recovery in the oil price, or easing of sanctions, the consequences may even be worse than Russia’s 1998 crisis, during which the country defaulted on its debt and devalued the rouble. The repercussions of the 2008 financial crisis were by no means minor for Russia—it was one of the worst-affected emerging markets: adjusted for inflation, GDP declined by 9 per cent from its pre-crisis peak and the currency lost over a third of its value against the dollar. But this pales in comparison with the 1998 crisis, when real GDP plunged by 11 per cent, the rouble lost 80 per cent of its value and lending rates rose five-fold to 150 per cent.
Russia’s external and public sector balance sheets are stronger now than they were in the late 1990s. Although they have deteriorated since the financial crisis, they are still some of the best among emerging markets. Russia’s stock of external debt as a share of GDP and exports is lower than it was before the 1998 crisis. Government debt has also fallen. Russia’s liquidity buffers are stronger, with a substantial build-up of foreign exchange reserves. The economy has a current account surplus and in 2014 a modest fiscal deficit. Crucially, Russia has moved away from the rigid currency peg of the 1990s to a more market-determined exchange rate.