Russia's woes

The Russian economy is not going through its best moment. Economic sanctions imposed by the West and slumping oil prices are denting Russia’s finances. The ruble, according to some estimations, has lost around 50% of its value against the dollar. How?

A very simple explanation would be the fact that following the sanctions passed by the western economies, Robles started to flood the markets as no buyers were willing to purchase them. Dwindling demand is therefore causing the ruble to crumble. Loss of value in the international currency markets is a relief for an oil exporting country like Russia, because it makes its exports (mainly gas, oil and its derivatives) more attractive, however falling prices in the oil industry are taking a big chunk of revenues out of Russia’s vaults. On the other hand, the depreciation of the Russian currency is pushing up prices in a country that is heavily import-oriented in terms of goods and services, increasing inflation and deteriorating living standards.

According to its Central Bank, the estimation of the current account of the Russian Federation in the third quarter of 2014 was + $11.4 billion. This surplus is sustained by revenues deriving from oil, but recent tumbles in its value along with higher prices of imports could shrink that surplus rendering Russia with an even worse enemy: Foreign denominated debt. It amounted to $678.4 billion in July 2014. That debt would become increasingly harder to pay off as the ruble and revenues continue their downward spiral.

In the short run, the sanctions causing the ruble to fall are not to be lifted any time soon, and according to the OPEC, production of oil will not be curtailed to push prices up. What other options does the Kremlin have?

One is the purchase of abundant rubles in the market using foreign reserves, an action that has already been performed unsuccessfully. Although foreign reserves account for a staggering figure of $510 billion according to the World Bank, the process might be costly and risky as foreign reserves would be at some point very low or depleted.

Many argue that the best option to gain the confidence of international markets is to diversify its economy so that it does not rely entirely on oil. The exporting of other goods and services could provide the treasury with more funds as well as pushing up the ruble.  That option could eventually reduce the price of imported goods and consequently inflation. Other than that, diversification might serve to let off steam in the economy as it would make external debt relative to exchange rates more affordable, moving Russia away from the default cliff.