The financial stress and the decline in oil prices have been markedly worse than the economists expected in the latest overview of the Russian economy, published in Nordic Outlook in November 2014. Since then oil prices (Brent crude) have declined from 78 dollars per barrel to 59 dollars. During the corresponding period the ruble has depreciated from around 45 against the dollar to the current level close to 61; a decline of around 25 per cent. Earlier this week the ruble temporarily touched 79 against the dollar.
The turmoil has happened against a backdrop of continued tension in the Russia-Ukraine conflict and worries that the EU, the United States and other Western powers will escalate economic sanctions against Russia.
Ruble vulnerable despite CBR measures
The Central Bank of Russia (CBR) has stated repeatedly that the ruble is "extremely undervalued" and has stepped up efforts to try to halt the ruble rout.
“In the short term we expect the ruble to remain vulnerable despite further CBR measures. Assuming that oil prices will stabilise in second quarter of 2015 and appreciate in the third and fourth quarter 2015, the ruble should return to a fair value of around 45 against the dollar,” says Mikael Johansson, head of Central and Eastern European Research at SEB.
Negative effects on the real economy
Assuming that the oil price will be 70 dollars per barrel, rather than the 85 dollars SEB earlier forecasted for 2015, combined with the severe ruble depreciation in recent weeks should result in a clear negative effect on the real economy. GDP will be affected through two main channels; private consumption and capital spending.
“In 2014, economic growth has been weak but has not collapsed, despite the Russia-Ukraine conflict, lower oil prices and waves of financial stress,” says SEB Russia specialist Andreas Johnson.
In the third quarter, GDP growth decelerated slightly to 0.7 per cent in year-on-year terms. A resilient industrial production, strong agricultural production and a relatively mild dampening of private consumption growth has compensated for various negative growth effects stemming from the Russia-Ukraine conflict including sanctions. SEB expects GDP to grow by 0.7 per cent in 2014.