Russian Economy

Today: Major Risks and

Challenges
Harsh Vardhan Mohta
Seat no: 67
Sagar Kyatanavar
Seat no: 25
Tanush Ragib
Seat no: 33
Shashank Verma
Seat no: 73
Prateek Jain
Seat no: 70
Sindhu Vaddi
Seat no: 62

Kievan Rus
Kiev originally the
center of Rus, a
federation of East
Slavic tribes, ca 8821240
1223: invasion of the
Mongols
1240: Total
destruction of Kiev,
end of Kievan Rus
1480: end of the
Mongolian
domination

Grand Moscow Duchy

Late medieval state
centered on Moscow, 12831547
Moscow first mentioned in a
1147 chronicle
In 1547 Ivan the Terrible
proclaimed the Tsardom of
Russia
Ukrainian lands dominated
by Polish and Lithuanians
from the end of Mongol rule
in 1480
Crimean Khanate
established in 1449, existed
until 1783: neither Russian
nor Ukrainian

Tsardom of Russia
1547-1721
Grew 35000 sq.km.
a year
1654: Bogdan
Hmelnitsky, a
Ukrainian leader,
offered the Tsar to
make Ukraine part of
Russia to avoid
Polish domination

New Russia
1764: Russia
conquers the
lands to the
North of Black
Sea from the
Ottoman Empire
The new region is
called New
Russia, active
migration by
Slavs: Russians
and Ukrainians
1783: Russia
annexes Crimea
after defeating
Crimean Khanate

The Soviet Time

1917: Communist revolution in Russia
1918: Ukraine proclaims an independent Ukrainian Socialist
Republic
1922: the USSR formed that included Russian Federation,
Ukrainian Socialist Republic (formed in 1918), Belarussian
Socialist republic, and Transcaucasian Socialist republic
Ukraine becomes an autonomous republic within the Soviet
Union
1954: Crimea transferred from the Russian Federation to
Ukraine
1991: Collapse of the Soviet Union, Ukraines independence

Ukrainian Crisis
21 November 2013: President Yanukovitch backs out of signing the
Association Agreement with the EU, accepts $15bn loan from Russia
22 November 2013: Protests break out in Kiev, the capital
20 February 2014: large-scale clashes between police an protesters
21 February 2014: Peace agreement signed between opposition leaders
and Yanukovitch, also signed by Foreign Affairs ministers of Germany and
Poland
22 February 2014: Radical opposition leaders refuse to recognize the
peace agreement, make Yanukovitch leave Kiev
23 February 2014: Turchinov proclaimed enacted President of Ukraine
23 February 2014: Law granting Russian the regional status language
abolished
27 February 2014: Crimean parliament decides to declare independence
16 March 2014: referendum in Crimea on independence
18 March 2014: President Putin signs a decree on Crimea re-joining Russia

Sanctions: History
First Round:
Immediately after March 16, 2014 following on Crimeas
joining Russia
Target: individuals banned from visiting EU, Canada, the US;
doing business is also prohibited with them

Second Round:
April 28, 2014
Further visa bans, 17 Russian companies

Third Round:
July 17, 2014: Malaysian MH17 crash
Government-owned Russian banks, trade restrictions on
defense industry, additional visa bans
Inability to borrow for more than 30 days

Ruble Depreciation
Depreciation by 23%
(RUB/USD), 14% (RUB/EUR)
RUB/EUR

Most depreciation occurred

after the third (sector)
round of sanctions
Capital flight due to
increased geopolitical
uncertainty

RUB/USD

Exports did not grow

proportionately to rubles
depreciation due to global
economic slowdown
Ability to borrow abroad
restricted by sanctions,
limiting supply of foreign
currency

Inflation Acceleration
JAN

FEB

MA
R

OCT

NOV

DE
C

0,21

0,57

0,56

0,5
1

0,10

0,55

0,46

0,34

0,5
4

0,36

0,80

0,91

0,83

0,6
9

APR MAY JUN

JUL

AUG

SEP

201
4

0,59 0,70 1,02 0,90 0,90 0,62

0,49

0,24

0,65

201
3

0,97 0,56 0,34 0,51 0,66 0,42

0,82

0,14

201
2

0,50 0,37 0,58 0,31 0,52 0,89

1,23

200
8

2,31 1,20 1,20 1,42 1,35 0,97

0,51

Inflation picked up significantly shortly after the first round of

sanctions
Inflation rate kept roughly at or below the similar inflation level of
2008, the year of the global crisis
January--September 2014: 6.27%
JanuarySeptember 2008: 10.57%; January-September 2013:
4.72%

Capital Flight

Sharp increase in capital outflow in January 2014 was attributed to looming

Western sanctions

Capital outflow is not much different relative to the average of previous years

Capital outflow does not increase dramatically as sanctions mount

Capital outflow is probably more the result of Russias structural problems rather
than sanctions

Russian Stock Market

Response
RTSI grew
after the
first round
of
sanctions
March
2014
Sanction
s

September
1995
Source: RBK quote.rbc.ru

3
November
2014

Mar
ch
200
4

March
2014
Sanction
Augus
s
t
2008

Market as
a whole
appears to
be ranging
2008 crisis
had much
larger
negative
effect

Russias Food Imports

Ban
Import ban on food imports from the EU, US,
Canada, and Australia seems most important
response so far (7 August, 2014)
In August alone
Moscow food prices up by 7%
St. Petersburg, 10%
Pork and chicken prices up by about 25%

Poland, Finland and Lithuania most affected by

the Russian food ban

Abolishing Bilateral Corridor on

November 10, 2014

The Ruble was allowed

to move within bounds
for a bilateral currency
basket prior to the
sanctions
Corridor bounds were
adjusted tens of times
since the start of 2014

Source: Roskomstat

Discount rates
increased three times
since January 2014
Interventions until
2015 only at the
bounds
Floating exchange rate
introduced in 2015

What Measures Would Really

Hurt the Russian Economy?
Restrictions on gas and oil exports
Exclusion from financial networks:
VISA, Mastercard, SWIFT etc
Persuade OPEC to increase oil
production

Oil and Gas in the Russian

Economy
Budget crucially depends
on
the oil-gas revenues
30% of all Russian gas
production is meant for
exports

Non-oil deficits persisting

Rising energy prices increased

oil-gas revenue component of
the Russian budget without any
growth in the physical volumes

Oil Price Evolution

If the trend
continues:
Further
deterioration
of the
government
budget
Depreciation
of the ruble
Further
pressure on
the National
Welfare Fund
to finance
budget
deficits
risk of social

EUs Dependence on
Russian Energy Supplies
EU depends on
about 1/3 of its
energy
consumption on
imports from
Russia:
34% crude oil
26% solid fuels
(mainly coal)
32% natural gas
Germany, Italy,
and Eastern
European
countries are the
most vulnerable
importers

EU and Russias Dependence on

Ukrainian Transit
42% of Russian gas
exports depends on
Ukrainian transit

F
I

S
W

North
Stream

B
PO
GE
R
L UK
R
South
Stream

R
U
TR
K

Ukraines inability to
pay the contracted
prices led to gas
supply shortages in
2006 and 2009
Ukraines current
debt reached $5bn
To avoid dependence
on Ukraine, Russia
started constructing
the North and South
Stream pipe routes

Gas Dependence and

Sanctions
One way to really hurt the Russian economy is to
limit her gas and oil exports
Cutting Russian gas and oil imports is:
Difficult since alternative suppliers are difficult to find
Politically impossible since the voters will not
welcome electricity and heating shortages

Therefore, the most potent measure to punish

the Russian economy will not be taken in the
foreseeable future

Other Potent Sanctions

Ban VISA, Mastercard etc from doing
business with Russia
Private companies are unwilling to lose their
business

Exclude Russia from financial networks

e.g. SWIFT
Applied to Iran in 2012
May be difficult to apply to Russia since that
would hurt EUs trade with Russia, including
energy import deals

Economy Near Potential

Output
Growth rate of 7% prior to the crisis of 2008
High carbohydrates prices
Spare capacity

Growth rate of ~1% during 2009-2013

~5% for similarly large emerging economies
~3% for resource-rich countries

Currently
Weak credit growth
Slow rate of new business creation

Structural problems, not cyclical ones, mostly constrain the

expansion of potential output

Resource Rents and Red

Tape
Resource-rich countries are prone to high resource
rents
Short-termism
High extent of reliance on subsidies and transfers

Red tape restrictions

Far Eastern tuna / sanctions
Incumbent bureaucracy has few incentives to promote
competition

Importance of performance-oriented public sector

Weaning bureaucracy off the resource exports revenues
Linking size of compensation to performance indicators

Oil/Gas and Hard Budget

Constraints
Carbohydrates-based growth ensures persistence
of soft budget constraints
Janos Kornai (Econometrica, 1979)
Bailing out loss-making state enterprises during the Soviet time
Source of government transfers and subsidies to pay for social
obligations e.g. pensions currently

Hard budget constraints

Shown to increase aggregate production efficiency
Are spurred by
US/EU sanctions
Dwindling oil prices

Are Russias chance to diversify its economy away from being a

carbohydrate-oriented one

Diversification
Tangible assets: not a major problem
a wide range of industries
decent GFCF rates
Improving infrastructure

Intangible assets: institutional framework

MAJOR problem
Contract law
Independent courts
Police corruption
Accountable public sector

Geographical
Decreasing extent of dependence on EU for hard currency flows
Reorientation to emerging Asian markets, specifically China
Power of Siberia
Transsiberian link to Korean railway networks

Payments in rubles/yuan

THANK YOU