Last week was yet another in a row of bad weeks for Russia, writes Professor Stefan Hedlund. By Friday night (December 12), the price of Brent crude had plunged again by US$6, to end at US$62.45.
The rouble had continued its slide, to end at 58.50 roubles to the dollar. And the Russian market dropped another 100 points, leaving the RTS Index at 800.
Since June 25, Brent has fallen by 45 per cent, from US$115.7. The rouble has lost close to half its value, from 33.7 to the dollar while the RTS has fallen by 44 per cent, from 1,421.
It is small wonder that the West has begun deliberating on a pending collapse of the Russian economy. Some Western governments could be hoping that the regime of Russia’s President Vladimir Putin will be swept away.
But these scenarios need thinking about.
Ukraine is faced with imminent default. Russia is not.
Those who see sanctions working have particular reason to rethink. According to Russian Minister of Finance Anton Siluanov, sanctions will cost Russia US$40 billion a year, compared wih a loss of US$100 billion from the drop in the price of oil. And that was said when the price of oil was still at US$80 a barrel.
Compared with most EU countries, the Russian economy is still in excellent health, and its fiscal defences remain strong.
At the end of November 2014, Russia’s international reserves stood at US$418.88 billion and its sovereign foreign debt (end September) was a mere US$48.13 billion.
If OPEC had managed to stabilise the price of oil at US$90 a barrel or over, then Russia would have been able to shrug off sanctions for years to come. As it is, combined with the impact of sanctions, the drop in the price of oil is shaping up for a perfect storm.
Still, it is not the government which is mainly at risk. Half of federal budget income is from gas and oil. But since the rouble has fallen in line with the price of oil, the effect on the budget cancels out.
The real cause for alarm lies in servicing non-government foreign debt. While sovereign debt has been reduced to insignificance, banks and corporations have taken on massive debt. Total foreign debt in consequence stands at US$678.44 billion. Of this, US$30 billion is due during December 2014 and an additional US$100 billion during 2015. As sanctions have cut off all refinancing, all debt service will have to be paid.
This is complicated by the fact that of total international reserves, only US$373.66 is foreign exchange held by the Central Bank. The remainder is US$45.22 billion in gold, US$88.94 billion in the Reserve Fund and US$80.0 billion in the National Wealth Fund. The former is not very liquid and the latter two are controlled by the Ministry of Finance.
Russia’s defences will suffice to tide it over 2015. The real crunch will come in 2016, which is also an election year.
By then, both the precautionary funds are likely to have been drained on bailing out banks and corporations, the current account will be negative and the budget will be deep in the red. For the Putin regime, that will be the moment of truth. For now, it is doing just fine.