Western politicians have grown increasingly fond of claiming that economic sanctions against Russia are biting. Pundits have joined in predicting that the Russian economy is collapsing. There is little truth in any of this, writes Professor Stefan Hedlund.
The economic situation is undoubtedly serious, but it is very far from the point where it might cause the Kremlin to back off Ukraine, and the state of the economy is even further from outright collapse.
There is a risk of over interpreting the sharp fall in the price of oil. It is true that energy export has accounted for half of federal budget revenue. But given that the rouble has fallen together with the oil price, the impact on budget revenue has been close to neutral. Rising inflation has brought added support, by raising domestic tax revenue.
For 2015, the government has adjusted its oil price expectation from US$95 to US$50 per barrel. Moscow expects a three per cent real drop in GDP, and with a 10 per cent cut in non-defence spending it will run a budget deficit of three per cent of GDP. That deficit will be covered by converting part of the US$85 billion stored in the Reserve Fund. The rouble is expected to stabilise at around 60 to the dollar.
This is a wise policy move. Aside from rising inflation, the downside from a weakening rouble is that the rouble cost of servicing foreign debt goes up. And Russian companies have been much too highly leveraged. An important part of sanctions has been to cut off their access to foreign credit in the hope that this will exhaust Kremlin reserves.
During 2014, the absence of refinancing did mean Russian external debt fell from US$732 billion to US$599 billion. But this ongoing delinkage of Russia from outside credit markets has not caused a collapse.
At the end of January 2015, international reserves were still US$376 billion, down from US$499billion a year ago. Although US$159 billion is locked into two sovereign wealth funds, liquid reserves remain ample.
Total expected foreign debt service for 2015 is given at only about US$110 billion. And actual demand for forex is going to be much lower than listed by the Central Bank.
One reason is that Russian firms have hoarded currency reserves in anticipation of the credit squeeze. Another is that much of the listed debt repayment is to Russian firms abroad which may extend the terms. Intercompany loans account for US$130 billion of the remaining total debt. Demand for forex for 2015 may be as low as US$60 billion, which is well within what the Central Bank can cover.
None of this should be taken to imply that all is well.
Steady attrition means that, within a year or two at the latest, Russia’s reserves will have been exhausted and the real hammer will come down. But by then the Ukrainian economy will have already collapsed. And we may recall that the stated purpose of sanctions was to help Ukraine - not to destroy Russia.