Economic Crisis in Russia
Rebecca M. Nelson, Specialist in International Trade and Finance (firstname.lastname@example.org, 7-6819)
December 17, 2014 (IN10200)
On December 15, investors started a massive sell-off of Russia's currency, the ruble. This accelerated
depreciation of the ruble, which had been ongoing for several months. In order to stem its further
depreciation, the Bank of Russia (Russia's central bank) announced its biggest interest rate hike since
1998, raising a key interest rate from 10.5% to 17%, at an emergency meeting on December 16.
Despite this measure, the ruble sharply depreciated throughout the day, falling from 58 rubles per
dollar to 80, before rising again to 70. The central bank is currently intervening in foreign exchange
markets (meaning it is selling foreign currencies and purchasing rubles) to support the value of the
The proximate cause of the sell-off was likely a deal announced between Russia's central bank and
Rosneft, a major state-controlled oil company, to help cover the company's debts. Many investors
viewed the nearly $11 billion deal as potentially inflationary and, given the favorable terms of the deal
and the close ties between Rosneft and the Kremlin, a signal that the central bank may not be immune
to political pressures.
Depreciation of the ruble will likely exacerbate inflation in Russia. Consumers in Russia are rushing to
purchase durable goods, like cars, which are now viewed as more reliable stores of value than the
ruble. A weakening of the ruble also raises the value of foreign-currency debt in terms of rubles. The
Russian government has relatively little debt, but some Russian corporations are more indebted. High
interest rates will likely have severe adverse consequences for Russia's growth prospects.
In the 2000s, Russia benefited from rising oil prices, but it was hit hard by the global financial crisis in
2008-2009. Russia's economy sharply contracted by 7.8% in 2009. Growth rebounded in 2010, but has
been falling in subsequent years. Economic pressures in Russia have been building in recent months,
marked by capital flight, steady depreciation of the ruble, inflation, and lower economic growth.
Figure 1. Economic Trends in Russia
Source: CRS compilation of data from the IMF and the Bank of Russia.
Capital flight: In the first three quarters of the year, net private capital outflows from Russia
totaled $85 billion, compared to net outflows of $54 billion in all of 2012. In December 2014,
Putin announced that one of Russia's sovereign wealth funds, the National Welfare Fund, would
be used to recapitalize Russian banks.
Depreciation of the ruble: Capital flight from Russia contributed to downward pressure on the
ruble, which depreciated against the dollar by more than 50% between July 2014 and early
December 2014, even before the events unfolding on December 15 and 16. Russia's central bank
spent $80 billion to support the ruble in 2014, before the most recent round of currency
Inflation: In November 2014, inflation in Russia increased to 9.1%, the fastest acceleration since
2011 and well above the central bank's target rate of 5% to 6%. In addition to depreciation of
the ruble, inflation has been caused by Russia's ban on certain agricultural imports from countries
imposing sanctions, which has caused some food prices in Russia to rise dramatically.
Diminished growth prospects: In October 2014, the IMF downgraded its forecast for Russia's
economic growth in 2014, from 1.3% to 0.2%. It projected that Russia's economy will only grow
by 0.5% in 2015. Although the Russian government had initially been optimistic about its
economic growth prospects, in early December 2014, the Bank of Russia forecasted that the
economy could contract by 4.5% in 2015.
Economic instability in Russia is likely driven by low oil prices, which have fallen by more than 40%
since June. Russia is a major oil producer and exporter, and oil and gas account for about half of the
government's revenues. Targeted sanctions imposed by the United States, the European Union (EU)
and other countries on Russian individuals and entities may also have been a factor, although it is
difficult to assess to what extent. U.S., European, and other countries' financial institutions have
reportedly cut off many major borrowers in Russia, even those not on the sanctions list. Other factors
could also include questionable domestic economic policies; the general political crisis in Ukraine;
corruption; and an economic slowdown in Europe, one of Russia's major economic partners.
Issues to Watch
Next steps for the Russian government? How long will Russia's foreign exchange reserves last if
it continues to intervene in foreign exchange markets and provide support to selected Russian firms
and banks? By most measures, Russia has large foreign exchange reserves, totaling $374 billion at the
end of November 2014. However, some analysts question how liquid Russia's foreign exchange
reserves actually are. A former finance minister claimed the amount could be as low as $200 billion.
Some analysts have suggested that the Russian central bank could impose capital controls to stop
money from leaving the country, but there are questions about the effectiveness and long-term
consequences of capital controls.
Contagion to other emerging markets? Russia is a major player in the international economy: it
has the world's ninth-largest economy and a population of more than 140 million. There are questions
about whether investors will differentiate the economic challenges facing Russia as unique from those
facing other emerging economies, such as India, South Africa, and Turkey, or whether the crisis will
trigger broad capital flight from emerging markets to "safe havens," like the United States and the EU.
Spillover effects for the United States? Overall U.S. trade and investment ties with Russia are
relatively limited, but some major U.S. firms, such as ExxonMobil, General Electric, Ford, and Pepsi,
among many others, are active in Russia. An economic crisis or prolonged economic downturn in
Russia could directly impact these firms. It could also create disruptions in the global economy that
could impact the U.S. economy more indirectly, particularly as growth in many countries—including
Europe, Japan, and China—has slowed. In particular, the economic impact of the crisis on Europe could
have implications for the U.S. economy, given tight U.S.-EU economic ties.
Related Issues Before Congress:
Russia and the Caucasus