The fact is, Russia’s economy has been in stagnation for some time. International tensions have meant that attention has been diverted from domestic affairs, but it is clear now that Russia is in financial trouble.
The reasons why Russia’s economy is skating on thin ice are twofold: the value of the rouble has depreciated by 40% this year, as the Superpower has had to contend with sanctions imposed over its involvement in Ukraine, and secondly, there has been a near-50% fall in oil prices.
Perhaps the most damaging sanction is that major state oil firms and banks such as Gazprom have been listed, to the extent that EU and US citizens are barred from providing financing to Russian state-controlled banks. Uh oh, you guessed it: we want to make it virtually impossible for our Eastern European frenemy to access EU and US capital markets. No access, no party.
Russian banks have responded in kind by raising interest rates on loans. To be fair to them, they don’t have too many options (other than to call a halt to the palaver in Ukraine). Raising interest rates is a legitimate ploy where the public has cash to splash. In times of austerity, who is going to sign up to paying back loans subject to 17% interest? And you thought Student Finance was bad.
Just like Brendan Rodgers’ acquisition of the enigmatic Mario Balotelli, this plan was always fallible. Russia has had to bail out its first bank, the Trust Bank (which in hindsight seems about as trustworthy as Mr Balotelli), by handing it a £340 million lifeline. This raised eyebrows at the IMF, who warned that Russia risks triggering a new phase of recession. Russia must ensure they don’t follow the Northern Rock guide to banking by making loans accessible with unconscionable interest rates; as a consolation, at least Bruce Willis (whom the Trust Bank uses to market its credit cards) can be the poster boy for this financial Armageddon.
The depreciation of the rouble can also be explained by the global oil crisis. Whereas poor politicking by Russia is the reason why they are subject to sanctions, the oil crisis is a team effort. OPEC are a power-hungry Cartel who refuse to allow oil prices to be increased in order to preserve their monopoly in the market.
Such a move by OPEC is detrimental to the Russian Government because oil revenues account for 45% of government revenue: where a country is reliant on income from a commodity as important as oil, it simply cannot afford to sell barrels at a low cost. Coupled with the fact that Russia doesn’t have too many allies, the situation is exacerbated.
Perhaps a silver lining can be found from the fact that China have offered to assist Moscow in clearing the rubble, I mean the rouble. However, we’re a cynical bunch here at The Commercial Cartel. China are interested in the stability of the rouble because they want to reduce reliance on US Dollars in international transactions.
Putin it mildly, Russia have got a long and lonely road to recovery.
By Kamran Khan