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Just last week, Russia's currency, the ruble, fell sharply in value by almost 20%. This drastic event sent Russia's central banks into chaos as they consistently increased interest rates to try to rebalance the ruble. On Thursday, Putin declared that the ruble has reached its highest value in three weeks and is stable again. Unfortunately, economists warn that the fall and subsequent recovery of the ruble is not going to pass without adverse effects, both for Russia and for the global economy. Russia, which has already had a rough year economically, now is forced to withstand the threat of an impending recession. Other regions of the world will also have to be wary of the impact of the ruble dilemma.
First off, the impact felt domestically will be immense. The ruble fiasco comes with a package of other economic burdens for Russia: trade sanctions from several major nations (a direct consequence of its invasions of Ukraine and Crimea), the recent drop in oil prices (which the Russian economy is built upon), and the massive debt owed by Russian companies valued in foreign currency. As a result of all this, Russia's finance minister, Anton Siluanov, predicts that the Russian economy will recede by 4% during 2015. This brings with it many side consequences. Siluanov also claims that there will be a budget deficit of 3% of GDP, depending on the direction that oil prices will go next year. Russia's credit rating may be cut to below investment grade. Consumer inflation is on track to reach its highest level in seven years, and the ruble, currently valued at 62.04 rubes per dollar, is expected to drop down again to 51 rubles per dollar next year.
All of this may force Russia to take drastic measures. Already, the exponential increase in interest rates needed to rebalance the ruble has been looked upon as a risky move, and Russia claims it will lower these rates again as soon as it possibly can. The Russian government has also ordered state corporations to sell off amounts of their foreign currency holdings. This has helped the ruble's recovery, and will hopefully help to also satisfy market demand to repay off the debt held by these corporations. Another big measure Russia may have to take is making use of its reserve fund, often a necessary measure to control inflation and deficits. If this occurs, Russia's international reserves stand to reduce to its lowest levels in more than five years, which could be dangerous for future economic needs.
The effect of the this crisis is likely to hit other nations. As the United States dollar continues to garner strength against the ruble, its international corporations stand to see a drop in their profits. The high-yield bonds market may also be impacted by the drop in oil prices, making it difficult for these corporations to buy back stocks. Countries that produce oil but do not see much profit from these ventures also may suffer economic downturns similar to Russia's, including Norway, Venezuela, Iran, Nigeria, and Angola. Emerging markets also are likely to be affected negatively, as they struggle to pay back their debts. The rest of the BRICS nations (Brazil, Russia, India, China, South Africa), which also stand to be impacted, are already facing their own economic problems. Brazil has already little to no economic growth this past year, and China is facing a slowdown in its growth rate, as discussed in an earlier blog post. Amid all this, it seems the region of the world that surprisingly has the least to worry about Russia's crisis is Sub-Saharan Africa, which engages in less trade with Russia than most major nations.
Overall, what it looks like is that nations that heavily export oil and others nations based on similar commodities stand most to suffer from the decline of the ruble and oil prices, which seem inexorably linked. How do you think that Russia and the nations that will be affected by its economic problems can prepare to face these challenges.
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