Russia - a standard of economic weakness

If we look at the state of the Russian economy, it turns out that Russian power is quite fragile. Clearly the only thing that has to worry about the West is that the collapsing oligarchy in Russia does not cause a nuclear conflict. Nowadays, executives of Russian destruction orders, North Korea, use outdated Russian developments to gain recognition as a world power, however ridiculous it may seem, against the backdrop of their real state. The macroeconomic picture and the investment potential of the Russian economy are becoming more and more serious in the field of analysts and the media. Indeed, Russia has never been able to boast of a particular economy based on the production of other than natural resources. Among the main reasons are geopolitical interventions by President Putin and the deep collapse of international oil prices. In 2015, Russia's GDP declined by 3.7%, and the IMF forecast for 2016 is for a further decline of 1%. A return to economic growth is not expected until 2018, but this is unlikely. Such forecasts show that the current crisis has a more structural dimension than the 2008 oil crisis and the 1998 public finances crisis in Russia In both cases, the recovery started after only one year or at most two.

The Russian economy is initially weak

It is important to know that whatever Russia claims, the economy is over six times weaker than the US economy. At present, even South Korea has a stronger economy than Russia. The only economic boom that has experienced Russia in recent years is the leap in oil prices over $ 100 a barrel, which has not happened for a long time. The economy of Russia depends on 70% of the price of oil, which is now also detrimental to it. To the mime, the "black days" fund that the Kremlin formed in 2000 is exhausted and things for Russia become too dangerous.

Oil - the leaking blood of the Russian economy

It is no secret that the Russian budget is largely dependent on government revenues from oil and gas products. It is not surprising that the sharp impact of the oil price collapse on the budget and on the development of the entire Russian economy. Revenues from the sale of oil and gas products account for nearly 50% of the country's budget over the past 10 years. This revenue also accounts for 70% of total export revenue and 25% of total GDP. The continuing dependence on exports of energy commodities is evidence of the failure of President Vladimir Putin's attempts to diversify the Russian economy - intentions he declared 15 years ago. In April 2001, ahead of the Russian Duma, Putin sharply criticized the fact that the Russian economy was heavily dependent on oil revenues and said the main task ahead was a massive diversification policy. To date, there is no change in this direction. An apparent manifestation of Russia's large economic dependence on oil revenues is the logical collapse of the Russian ruble. The strong positive correlation between the price of oil futures, Brent varieties with delivery on March 16 and the ruble spot versus the dollar is evident in the first chart. Russian money reached a record depreciation on January 21, when it touched 86 rubles per dollar.

The high cost of geopolitics

The shifts in the geopolitical chessboard also had their reflection. The Russian currency collapsed almost twice since the Crimea's annexation in March 2014 and the subsequent US and EU sanctions to date. Devaluation of the ruble resulted in a 13-year peak in inflation in the country to 16.9% in March 2015. By comparison, in April 2012, inflation was at 3.60 per cent. In the years following the annexation of the Crimea and the start of the war in Ukraine, the number of people living below the poverty line reached 23 million people. The meltdown of foreign exchange reserves is also a logical consequence of the outflow of capital from Russia and the worsening of the overall macro picture in the country. The government and the central bank tried to stop the galloping depreciation of the ruble, but as is often the case, the effect of the interventions has turned out to be a reverse sign. One example was the intervention by the central bank on December 16, 2014, when the ruble to the dollar went up to 80 rubles per dollar. Then the governor of the Russian central bank Elvira Nabiluna decided to raise the interest rate by the remarkable 6 percentage points. The effect of melting foreign exchange reserves is clearly visible in the second chart. In 2014, Russian currency reserves melted by $ 150 billion. On January 21, 2016, at the last bottom of the ruble, Nabiulina silenced the financial audience, saying the bank would not react to this collapse, as it did in mid-December, because the ruble was close to its "fundamental levels" . The statement comes at a rate of nearly 82 rubles per dollar. A strange and dangerous strategy to soothe the market. Whether Russia is beginning to ripen the idea of ​​printing rubles is difficult to assume in response to the crisis. One thing is certain: if this happens, the purchasing power of Russian households and firms may be even more endangered. Even so far, the budget problems and the highly depreciating ruble have led to a decline in wage levels and a decline in consumer demand.

The strong depreciation of the Russian ruble hit mainly Russian citizens who are increasingly struggling to maintain their current consumption levels. The economic phenomenon of stagflation is already a fact of Russian land. We are experiencing both a decline in aggregate production and a rise in prices. Of course, we make the statement that the third main indicator in the stagflation grip, high unemployment, is relatively low for now. However, in view of the decline in the last few months of the working Russian population, the outlook for the labor market does not look positive.

Future threats

One of the main dangers to Russia's fiscal stability is the premise that budget deficits become chronic and thus increase the debt burden of the state. The originally planned 2016 budget is based on average prices of $ 50 a barrel (just under 30 at the moment), so the potential for the deficit this year to exceed the 3 percent of GDP previously is very high. Analysts from the RBC predicted that if oil prices dropped to $ 24 a barrel, then the budget deficit could swell to 7.5 percent of GDP.

It is noteworthy that the cost of military targets reaches record levels relative to general government spending in the context of the ongoing interventions of the Russian Army in Syria. This is an aggravating factor for the financial health of Russian public finances. We have seen similar actions and their subsequent effects less than two years ago. Following the escalation of the conflict in Ukraine and Putin's intervention, military spending has increased more than twice. Russia's average military costs for February, March and April 2014 amounted to 6.7% of GDP and 27.7% of total government spending.

Financing of deficit spending is a delicate issue in view of the relatively high interest rates on Russian debt in Russia and the indulgence of domestic agents for financing larger government securities issues. At present, public debt to GDP is about 14%, which is one of the lowest levels globally. The reasons for these low levels, however, lie in the indolence of foreign investors to buy Russian government securities. The prerequisites for such moods are the memories of the financial year 1998-1999, as well as the active role of Russia in the Ukrainian conflict in February 2014.

Evidence of the great likelihood of a serious budget deficit being inflated for the current 2016 is the Russian Finance Ministry's February 5th action. Financial authorities in the country have announced that they are probing the possibility of placing eurobonds on international markets. Russia's last foreign funding was in 2013, before the escalation of the conflict in Ukraine and the imposition of the first-stage sanctions by the EU and the US. Concerns about the slow exit of this situation are related to the objective assumptions that Putin has no vision and intention for structural reforms. The only rescue belts are the rise in international oil prices and the lifting of sanctions that have interrupted the access of key government-controlled companies (in the banking, energy and military industries) to international debt markets. These belts, however, do not seem to be close to Russia's outstretched hand. Reforms are needed to focus on more investment in technology production and the government loopholed around the door of private initiative. However, the complicated geopolitical situation poses too many risks to the Russian economy - pressure on the budget stemming from low oil prices and increased military engagements, the ruble loses its worth, and debt financing is limited. Against all this, the Russian economy does not seem ready for further exacerbation of the conflicts. The paradox is that precisely the steps that would help in the long run can quickly quench Putin's high rating in the eyes of Russian citizens.