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Russia's Economy Has Stabilised (We Told You It Would)

The predictions of the doom mongers given space in the mainstream are not coming true - as we said they would not. Also:

  • the sanctions are an afterthought
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This post first appeared on Russia Insider

The change in sentiment about the Russian economy since the start of the year is astonishing.

We would remind our readers that the well-nigh unanimous view of Western economic commentators during the period of the oil price fall and the rouble’s devaluation in the last quarter of 2014 was that in 2015 the Russian economy would either collapse or at the very least would face a severe recession.

We would also remind our readers that Russia Insider took a completely different view.  We argued that the devaluation of the ruble would over time prove to be a good thing.

While it is perhaps too early to predict outcomes for the whole year, it is increasingly looking as if our predictions are going to prove more accurate.  Interestingly, Anton Siluanov, Russia’s Finance Minister, now seems to have come round to our view (see the following piece from TASS - “Russia begins recovering from Dutch disease”).  Certainly the predictions of disaster that were widely made in the autumn are now looking grossly overdone.

The article by Kremlin critic Leonid Bershidsky of Bloomberg cited below makes this very point.  

Bershidsky also makes a point that all other Western commentary has missed.  

This is that much of the apparent 'fall' in the Central Bank’s foreign currency reserves since the start of the year is simply the result of the decline in the euro’s exchange rate to the dollar. Since a large part of the Central Bank’s foreign exchange reserves are made up of euros, this has made the dollar value of the foreign exchange reserves fall:

Russia has lost a little more than a quarter of its foreign reserves since mid-July 2014:


The decline was particularly sharp last December, as the central bank frantically sought a way to stop the ruble from losing value against the dollar. The much gentler slope on the chart -- beginning in January -- says more about the structure of Russia's foreign reserves than about chronic depletion.

In January 2014, Russia held $131.8 billion of U.S. debt. As its relationship with the U.S. deteriorated after the revolution in Ukraine and the annexation of Crimea, Russia began shrinking its dollar reserves and increasing the share of euros and gold. While the reserves as a whole dropped 23.9 percent in 2014, the holdings of U.S. debt fell 37.6 percent, to $82.2 billion. Russia now holds less U.S. Treasury securities than Ireland, Turkey or Singapore.

The total value of foreign reserves is expressed in dollars, so Russia's euro-heavy stockpile took a hit from the dollar's rapid appreciation against the euro this year. 


In the week ended March 20, the euro gained a little more than 3 percent against the U.S. dollar; that was the reason for the $1.2 billion uptick in Russian foreign reserves. 

The point is that the foreign exchange reserves are not being depleted to support a collapsing currency and banking system as was being widely predicted just a few months ago.

Bershidsky also rightly points out that the role of sanctions in affecting Russia’s economic performance has been grossly overstated. What has mattered to Russia over the last year is the oil price. The effect of the sanctions is secondary.

Unusually for an anti-Putin liberal, Bershidsky (always one of the more level-headed of Putin’s critics) also has some good things to say about how the economy is being managed, though he cannot resist the temptation to make some deeply unpleasant (and inaccurate) claims about Russia posing a "threat" to its neighbours. 

From Bloomberg's Leonid Bershidsky:

Last week, the Russian central bank's currency reserves increased for the first time since last July, showing that the economy might have moved past the panic caused by last year's oil price slump. 

Perhaps Russia's improving indicators will convince Western governments that economic sanctions are having no discernible effect and that President Vladimir Putin's regime and the country it runs aren't facing imminent collapse.


The central bank no longer had to prop up the ruble with big foreign exchange sales: The currency has been doing okay so far this year, partly because oil has bounced back from January lows, and partly because Russia, with an interest rate of 17 percent at the beginning of the year and 14 percent now, became an attractive, though risky, carry trade destination


Many of the unfavorable forecasts for the Russian economy - such as the one published a month ago by Anders Aslund of the Peterson Institute for International Economics - were predicated on the melting away of currency reserves. "Russia's reserve situation is approaching a critical limit," Aslund wrote. "At present, Russia loses more than $10 billion a month, which means that a real reserve crisis will erupt in the third quarter." That, however, is not going to happen unless the price of oil starts going down steeply again.


The current government forecast says the Russian economy will shrink 3 percent. If oil is higher than budgeted, however, the decline - which is inevitable for structural reasons, and because of the abnormally high interest rates left over from last year's defense of the ruble and that remain useful because they attract the carry trade - will be even less pronounced. 

Economists polled by Bloomberg still expect, on average, a 4 percent drop, but Goldman Sachs, for example, now predicts a decline of only 2.7 percent - in line with some forecasts from Russian liberal economists


So where do the Western sanctions come in? They don't. It's easy to see how Russian economic indicators react to developments in oil and foreign exchange markets, but not to the trade and funding restrictions. They are a nuisance to a number of Russian companies, but Sberbank, the mammoth state institution now unable to obtain Western funding, still reported a healthy profit of $7.7 billion for 2014. That's less than for the year before, but still far from tragic. 

Russia's economic managers, especially at the Central Bank and the Finance Ministry, should be given their due: In a difficult environment, they have avoided major mistakes and managed to keep open Russia's economy. 

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