how plunging oil prices are wreaking havoc in russia

RUSSIA’S GREAT DEPRESSION

PLUNGING OIL PRICES are pushing Russia’s economy past the point of no return

Russia is in deep trouble.

So deep, in fact, that it

could be headed for

an economic depression.

The source of its problems can

be traced to the price of oil.

Since the middle of last year,

oil prices have dropped by a

staggering 54%.

$40

$60

$80

$100

$120

Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15

Price Per Barrel of Crude Oil (Dated Brent)

This trend follows OPEC’s

attempt to bankrupt new, but

more expensive, sources of oil

in the U.S. and elsewhere.

But Russia has been hurt more

than most because a huge

portion of its economy relies

on energy exports.

In 2013, for instance, Russian

exports totaled $526 billion.

$305 billion of which related

to oil and other types of fuel.

Oil/Energy

$305B

Other

$221B

Russia's Exports

For Russia to avoid economic

contraction, oil must stay above

$90 a barrel.

Thus, not surprisingly, the plunge

in prices is having a brutal

impact on Russia’s economy.

Most critically, the value of

its currency, the Ruble, has

tumbled.

At the beginning of 2014, 34

rubles bought one U.S. dollar.

Today it takes 58 rubles!

0

10

20

30

40

50

60

70

2010 2011 2012 2013 2014 2015

U.S. Dollar to Russian Ruble Exchange Rate

As a result, import prices

have effectively doubled.

And if Russia can’t import

products at reasonable prices,

then its standard of living will

drop precipitously.

One commentator is even

predicting that Russia’s GDP

could fall by as much as 10%

this year!

By comparison, U.S. GDP fell

only 2.8% in the worst year of

the financial crisis.

But perhaps most troublesome

is the impact on Russia’s banks.

To slow the sale of rubles,

Russia’s Central Bank hiked its

benchmark interest rate from

10% all the way up to 17%.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Apr. May June July Aug. Sept. Oct. Nov. Dec. Jan.

Russia's Benchmark Interest Rate: Apr. 2014 – Jan. 2015

The move, which inversely

impacts bond prices and bank

profitability, triggered the failure

of Trust Bank, a mid-sized lender

based in Moscow.

This may not seem like a big

deal, but we’ve learned over

the years that one bank failure

often begets others.

As Walter Bagehot wrote in his

seminal treatise on banking: "In

wild periods of alarm, one failure

makes many.”

The question, in turn, is whether

or not Russia can maneuver

around these pitfalls.

If it can, then it may be able

to avoid a deep depression.

But if it can’t, then we may soon

be witness to the first Great

Depression of the 21st century.

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