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5 Pressures on Russian Economy

By thinkadvisor

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The Russian bear probably wishes it could go into hibernation. Early. Sanctions, collapsing oil prices, the country’s main export, and high debt levels are taking a toll on the country’s economy in the wake of President Vladimir Putin’s actions in Crimea, and the longer the situation continues, the more the results are seen in sectors from foodstuffs to military contracting—not to mention the currency.

Despite his swagger, Putin faces a tough job—some of it of his own making. And some of the actions he and his government are taking to cope with economic chaos are actually making things worse. For instance, sanctions imposed by Europe and the U.S. made life tough enough.

But then he doubled down, imposing his own countersanctions, which cut off supplies of various goods, handicapped numerous sectors within Russia’s economy as Russians spent less and probably made older Russians remember the long lines and empty shelves of shops under Communism.

In addition, foreign investment dried up in all sorts of areas, making it tough for money to continue to flow unobstructed and business to continue as usual. Monetary strategy from Moscow has not improved the situation, leaving Russia—and many of its investors—between a rock and a hard place.

Here’s a look at five of the present problems facing the Russian economy.

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1.    Russian bonds:

Falling oil prices have made investors wary, since so much of Russia’s economy, and the value of its currency, is dependent on oil profits. In late 2014, Moscow had to cancel five bond sales in a row; although it had to cancel another sale in January, things had been looking up as the price of oil recovered some ground.

However, August didn’t start out well—either for oil, which hit levels not seen since 2009, or for bonds, which pretty much went begging after investors demanded a higher premium than the finance ministry was willing to pay. As a result, although two auctions saw bids on nearly all the 15 billion rubles ($236 million) in floating-coupon bonds, the auctions resulted in sales of 2.84 billion rubles, just 19% of the total, after the finance ministry decided to bow out on issuing the rest till a lower premium becomes acceptable to the market.

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2.    Ruble rubble:

Pity the poor ruble. Down in value along with the spiraling price of crude, despite a brief recovery earlier in the year, the currency has managed to erase any gains it made during 2015. With the price of oil continuing to fall—it’s lost half its value from 2014’s high—and economists predicting that Russia’s already troubled economy ain’t seen nothin’ yet, the ruble is in tatters.

Considering that earlier in the year it was the best-performing currency, that’s saying something. Russians are definitely not happy about it, because that means they’re able to buy less and less of any imports still being allowed into the country. And under Putin’s countersanctions, that’s not all that much.

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3.    Food, Glorious Food:

Remember those empty shelves? At least some Russians certainly do, and they’re not happy that Putin decided in June to extend his countersanctions on food imports from the U.S., Europe and other countries for another year. Last August Moscow banned the import of numerous food products, including cheese, fish, beef, pork, fruit, vegetables and dairy products, from the U.S., the EU, Canada, Norway, Australia and New Zealand.

But it’s not that easy for Russia to gear up quickly enough to replace all those goods with domestically produced products. Agricultural businesses are standing in line, waiting for loans that are slow to come from foreign investors or handicapped with high interest rates. That’s meant that inflation on food is running above 20%.

Besides, even if they could, Russians don’t necessarily want to rely solely on domestic food products—European and New Zealand butter, French cheeses and Norwegian salmon are wildly popular. In fact, under the embargo on dairy products, the consumption of butter has actually dropped as the price has risen; butter cost 15% more at the end of May than at the beginning of the year. Imports of butter and butter oil dropped by 71% in just the first four months of the year, compared with the same period in 2015. That’s one area in which the country has responded—sort of. Margarine production is up by 13%, according to a report from Hamburg-based market research firm Oil World.

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4. No Sail:

The French built them, the Russians bought them, and now Paris says Moscow can’t have them. The contract for two French-built Mistral-class helicopter carriers has been terminated, and France will keep the ships—which were contracted for under former President Nicolas Sarkozy when Russia was playing nicer with the rest of the world. The deal has been something of a thorn in the side of current President Francois Hollande once sanctions were imposed, and at first delivery of the vessels was simply delayed.

But now the deal is officially off. France has reimbursed Russia whatever it paid (the actual price of the warships was never disclosed, although in French newspapers it was reported as being worth some 1.2 billion euros [$1.3 billion]) and will return to Moscow any Russian equipment that already had been installed in the ships.

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5. There’s Gold in Them Thar Vaults:

Russia picked a bad time to invest in gold, and has made an already bad situation worse. It’s been boosting its international reserves to reach a target of $500 billion—but as the Russians are buying, the price of gold is falling, and so is the value of the rubles they’re buying it with. Practically a perfect storm, especially since it also had been buying up euros to increase foreign currency reserves, and of course the euro had its own troubles, what with that little business in Greece…

As of the end of July, the euro was down about 9.5% against the dollar, while gold had lost 8.4% of its value. In total, it’s estimated that Moscow actually lost about $200 million in its efforts to bolster reserves. Russia has finally halted its foreign currency buying spree—it sank about $10 billion into the effort just since the middle of May—and cut interest rates for the fifth time this year, but so far that hasn’t helped the ruble—or the gold stockpile situation.

It’s also made it tough for Moscow to lend to businesses that are trying to replace foreign investing with domestic funds. Despite the fact that the government and the Central Bank of Russia are becoming de facto lenders of last resort, the money isn’t flowing freely; there’s plenty of red tape in the way, and if loans are made too quickly Russia could actually deplete its foreign reserves and gold stores. The backstop? A $75 billion wealth fund that’s supposed to backstop Russian pensions.

thinkadvisor