World Economy

Russia Economy Slipping Into Recession

Russia Economy  Slipping Into RecessionRussia Economy  Slipping Into Recession

The Russian economy is about to slip into recession as energy prices stagnate and labor and capital reach full capacity, analysts say.

“Growth has slowed since 2012, partly for cyclical factors but mainly because potential output growth has slowed,” according to a recent report from the Organization for Economic Cooperation and Development, Anadolu Agency reported Saturday.

Russian growth until 2030 will lag behind the global average. Russia’s own Ministry of Economic Development slashed in November 2013 its projected long-term average growth to just 2.5 percent down from 4.3 percent in previous projections.

Energy revenue is critical for the Russian economy – it provides about half of the needs of the Russian budget.

“But Russia is now behind the US in oil and gas production,” explains Wolf-Fabian Hungerland, an economist with the Hamburg-based Berenberg Bank, in a recent note. “In particular, Russia has been recently under pressure from the low price of American natural gas. Further, Russia’s revenues as an exporter of natural gas are continuing to decline.”

  Pressure Mounting

But there is also pressure on Russia’s economy from within. Domestic demand is nearly exhausted – already Russian consumers spend on average nearly 40 percent of the household budget on food, according to Liza Ermolenko, an economist at London-based Capital Economics. Consumer demand has plunged as the ruble has declined in value, making imports more expensive.

And Russia’s ban on food imports from most of the western world, in retaliation for sanctions imposed for the Ukraine conflict, has made food scarcer and even more expensive across the federation.

“Russia’s food ban is high risk, low reward,” says Mark Adomanis, an expert on the Russian economy.

The decline of the ruble’s value has, in fact, sharply hurt the Russian economy. Russia’s currency has fallen to 48 per dollar from 33 to the dollar in January. Normally, this would help the Russian economy by making exports cheaper, but Russia exports mostly energy priced in dollars.

The result has been spiraling inflation, up to 8 percent currently, forecast to hit 9 percent before the end of the year, and only expected to fall as both consumers and businesses are obliged to cut back on spending.

 Currency Decline

The worst aspect of the ruble’s decline, from the perspective of economic growth, is that it has forced Russian businesses to cut back on investment. The low ruble forces Russian businesses to revalue their foreign currency debts, and this is an expensive process, warns Vladimir Tikhomirov, chief economist at Moscow brokerage BCS Financial.

The result is that many economists now predict that the Russian economy will fall into an official recession next year, with growth forecast to contract as much as 5 percent.

There is one bright spot in all this gloom: the Russian unemployment rate is 4.9 percent. One would expect a slowing economy to see a higher jobless rate, but Russia’s workforce is shrinking as older workers retire, and this has kept the unemployment figure lower than economists might expect, Adomanis says.

What the Russian economy needs is massive structural reform, the Organization for Economic Cooperation and Development says. 

“Making the economy stronger, more balanced, and less dependent on rents from natural resource extraction is a key challenge,” the organization’s report says. “This requires higher productivity growth and greater energy efficiency, both driven by competition, stronger investment and better matching of skills and jobs.”

This is no small challenge for the mastodonic Eurasian country.