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How Floating the Ruble Rescued Russia

Letting the ruble float means that Russia is now running a smaller budget deficit during its recession than the UK and U.S. have during their recoveries

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This post first appeared on Russia Insider

One economic figure more than any other exposes the nonsense of the hysteria about the imminent collapse of the Russian economy we were hearing at the end of last year.

The government has just announced that the budget deficit as a percentage of GDP was 3.7% in the period January to May of this year.

<figcaption>Figures are looking great for a "collapsing" economy</figcaption>
Figures are looking great for a "collapsing" economy

This is the budget deficit Russia is suffering during recession. That Russia is in recession, there is no doubt (see Stop Sugarcoating Russia's Economic Situation, Russia Insider, 30th May 2015).

This budget deficit of 3.7% of GDP Russia is running while in recession compares with the budget deficit of 5.7% of GDP the UK is currently running two years into its economic “recovery”.

In Britain the Conservatives have just won an election largely on the strength of their claim to have reduced the deficit.  

The British deficit has indeed fallen. In 2010 and 2011 --- the deepest period of the recession --- it was 11.4% and 10% of GDP, respectively.  Here are the figures.

What of the U.S.?  Its budget deficit is currently 2.7% of GDP -- less than Russia’s, but not dramatically so.

However this too comes several years after the start of a supposed economic “recovery”.  During the peak of the U.S. recession the budget deficit was 12.10% of GDP in 2010, 10.7% of GDP in 2011 and 10.1% of GDP in 2012.  In 2014 --- well into the “recovery” --- it was 4.1%.  Here are the figures.

In other words, “collapsing” Russia is running a smaller deficit during its recession than the UK and the U.S. have had during their “recoveries”.

The economist Paul Krugman argues that the deficits the UK and U.S. run don’t matter because they borrow in their own currencies.

There is force to that point.  

However, in the case of Russia it would be more correct to say that the government doesn’t borrow at all.  

The reason is that unlike the UK and U.S., Russia habitually either balances its budget or runs a surplus, and sets money aside in good times in its Reserve Fund (currently around $75 billion) to cover its deficit during recessions.

That doesn’t of course mean that the government can go on funding its deficit like this indefinitely.  

This year the government will draw down around $50 billion from the Reserve Fund to cover the deficit. Finance minister Siluanov has warned that if the deficit remains at 3.7% into next year the Reserve Fund would be exhausted around the middle of 2016.

However even that would hardly be a crisis. The government’s very low debt and the small size of the deficit mean the government would have little difficulty raising the funds or making the cuts needed to cover it, even if more Western sanctions were imposed.  

As it happens, with the economy showing increasing signs of recovery, that prospect looks unlikely.

The reason Russia’s deficit is so small despite the recession is because the size of the government’s oil receipts were to a great extent preserved by the devaluation of the ruble.

Though oil prices have fallen more than 40% since the summer of 2014, the ruble has fallen by a similar amount so that the same amount of oil produces roughly the same amount of rubles as it did this time last year. Since the Russian budget is in rubles this means that the deficit is much smaller than it would have been if the ruble had remained at the same level that it was this time last year.

The same is true of Russia’s trade surplus. Despite the collapse in oil prices Russia continues to run a healthy trade surplus because the fall in the value of the ruble has made imports more expensive, pricing imports out of the Russian market.

Far from being a disaster, floating the ruble and letting it fall was an intelligent response to the oil price collapse that happened last year. It puts Russia in a much better position than it would have been in had it tried to defend the ruble at an economically unjustified level.  

Floating the ruble --- and the steps needed to stabilise it when it hit bottom --- has however hurt people, causing inflation to spike, leading to the recession Russia is presently suffering (see Russia's Recession: A Necessary Re-Balancing, Russia Insider, 5th June 2015).  However it has paved the way for the economy to recover, probably at the end of the year (see Russian Central Bank Forecasts End of Recession in Final Quarter, Russia Insider, 8th June 2015).

Far from “wrecking Russia’s economy” Putin and the government last year did the right thing to rescue it from the consequences of the oil price decline, which in part explains why despite all the hardship they remain as popular as they are.

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