A website that was going viral on Russian social networks last week shows the rouble-dollar exchange rate, the rouble-euro exchange rate and the price of Brent crude changing in real time against a backdrop of slowly breaking waves, as soothing music plays in the background. “Russian zen: meaningless and merciless”, reads the bottom of the page Zenrus.ru. It is a play on a famous quote that Russian revolt is “meaningless and merciless.”
A zen-like calm is probably hard to come by for those watching the exchange rate and the price of oil: the rouble fell to new all-time lows of more than 54 to the dollar last week after the Opec oil producers’ group decided not to reduce production, which would have bolstered sinking oil prices. Russia is especially vulnerable to those prices, since energy exports make up half of its budget, and on Monday its currency recorded its largest single-day decline since the Russian financial crisis of 1998.
In all, the rouble has sunk by more than 40% this year as Russia has been buffeted by sanctions over its role in the Ukraine crisis and steep falls in the oil price. By the end of the week Brent was hovering below $70 a barrel, down from more than $105 at the start of the year.
The picture of Russia’s economic future is grim, despite the rosy outlook President Vladimir Putin tried to put on it in his annual address to the federal assembly on Thursday. Inflation has been rising, and recession next year is all but certain. On Tuesday, the economic development ministry reduced its GDP growth forecast for 2015 from 1.2% to –0.8%. State-owned banks have sought help from the government after the Ukraine sanctions cut them off from the western financial industry and its cheaper credit.
According to Vladimir Tikhomirov, an economist at Russian bank BKF, the two main factors responsible for Russia’s economic woes – sanctions and a low oil price – probably won’t change any time soon. “Oil has a stronger effect on the economy than sanctions, and the oil price and sanctions are speeding up macroeconomic processes that were already there,” Tikhomirov says. “The economy was slowing down due to structural difficulties even when oil prices were high. I think that next year there won’t be new sanctions but the current sanctions will remain; I think next year the oil price will be around $80 a barrel; and I think that the economy will shrink.”
But although such worrying numbers have led many to wonder if Putin’s standoff with the west might weaken his grip on power, analysts caution that the banking system is still functional and unemployment remains low. While concern over the economic situation is growing, the population’s “cup of endurance,” as the Russian phrase goes, is nowhere near to overflowing.
“I think a situation with the stagnation of manufacturing, the reduction of people’s real incomes and the rise in inflation – it will lead to Putin leaving power, but it could be in five years or in 10 years. There probably won’t be any positive changes before that,” says Konstantin Sonin, vice-rector and professor of economics at the Higher School of Economics in Moscow. “People’s reserves of endurance are very large.”
Yelena Tsereteli, an employee of state-owned Rosselkhozbank in the regional city of Kurgan, says that although her employer has reduced the amount of cash on hand for customer withdrawal, a run on the bank seems unlikely. But she has noticed customers taking out money to make investments in property, home renovations or cars.
“In terms of exchanging roubles for dollars, this isn’t really happening, but people have started to withdraw their savings and put it into something else. They buy a car or something, because they worry that the money will devalue,” Tsereteli says. “Otherwise they open accounts with higher interest rates, so that inflation doesn’t eat their money.”
A survey by the independent pollster Levada-Center found that 80% of Russians were worried about the country’s economic problems, especially rising prices and falling quality of life. Rising inflation – which went from 8.3% in October to 9.1% in November – has pushed up prices, since many consumer goods, especially food, are imported.
A ban on food imports from the European Union, the US, Australia, Canada and Norway ordered by Putin in response to western sanctions, while popular among the more patriotically minded, has worsened the situation. According to Russia’s state statistics service, prices for fruits and vegetables went up by 8.7% in November. Although the Kremlin has announced an import substitution programme and promised that domestic production will step up to fill the gap, reforming Russia’s declining agricultural industry will be a difficult and time-consuming task. In the meantime, analysts say, banned importers are generally being replaced by suppliers located further away, with the result that transport costs are driving up prices.
The government has begun taking steps to check rising inflation by burning some of its reported £269bn in foreign currency reserves, a good-sized pillow to cushion the economy’s fall. After Putin promised in his speech on Thursday that the government would take action against “speculators” who were fuelling the rouble’s fall, the central bank made its third large intervention of the week to defend the currency, allowing the rouble to rise to 52.4 against the dollar as trading opened on Friday. The central bank spent an estimated £1.6bn last week propping the currency up.
According to Tikhomirov, attempts to rein in inflation will not be effective so long as the currency hasn’t stabilised and structural inefficiencies haven’t been addressed, especially in sectors such as utilities, where prices have been rising steadily for years.
Nonetheless, Putin has argued that the devaluation of the rouble represents a “stimulus” for the economy, making Russian products more competitive on the world market. Indeed, large exporters outside the oil and gas industry, such as steel producer MMK, diamond miner Alrosa and fertiliser giants Acron Group and Uralkali, are seeing greater profits, according to independent analyst Timur Nigmatullin. He says that Putin is right – to an extent. If the rouble falls by 30% in a year, it can make Russia’s exports more competitive, but if it falls by 40% to 50%, it could lead to economic instability. The currency is currently poised between these two outcomes.
“Here the key role is played by balance. If the rouble remains where it is, it could be good. If the rouble continues to fall, it could be bad,” Nigmatullin says. “If it falls, it will lead to negative factors, higher cost of credit, problems with buying equipment from abroad … and the instability of the financial system. Investors will see more risk.”
At the same time, Nigmatullin argues that the financial situation of the majority of the population is not critical and several economic indicators are in fact positive. According to the state statistics service, real wages grew by 2.2% between January and October, GDP grew by 0.8% and the manufacturing index grew by 1.7%. The most salient number for political instability is unemployment, which remains low at about 5% and is not likely to increase, Nigmatullin says.
But while Sonin agrees low unemployment will have a calming effect, he argues that this level of manufacturing growth “is essentially stagnation for a big country like Russia”. Real incomes will begin falling, he says. The question is how long people will put up with it.
The answer appears to be a long time yet, according to Tikhomirov. “In the last few years, the income of the population grew a lot, wages and pensions grew very strongly compared to 10 years ago,” he says. “When they start to fall, there will be some time that the population will be prepared to grin and bear it: because of political reasons – but also because they have got a significant increase in income in recent years.”
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