Russian economic crises

Razane Chabib

Prepared for

Dr.Nour Roumieh

Panorama of the Lebanese Economy

November 1 , 2023
According to the International Monetary Fund (IMF), 70 countries are at risk of
debt distress—meaning they might default on their loans. That’s more than a third
of all countries in the world. Some nations have already tumbled into trouble:
Lebanon, Russia, Sri Lanka, Suriname, and Zambia have all defaulted. Russia is
believed to have defaulted on its debt for the first time since 1998 after missing a
key deadline.
Reasons
The financial crisis in Russia in 2014–2016 was the result of the sharp devaluation
of the Russian rouble beginning in the second half of 2014. decline in confidence
in the Russian economy caused investors to sell off their Russian assets, which led
to a decline in the value of the Russian rouble and sparked fears of a financial
crisis. The lack of confidence in the Russian economy stemmed from at least two
major sources. The first is the fall in the price of oil in 2014. Crude oil, a
major export of Russia, declined in price by nearly 50% between its yearly high in
June 2014 and 16 December 2014. The second is the result of international
economic sanctions imposed on Russia following Russia's annexation of Crimea,
the war in Donbas and the broader Russo-Ukrainian War.

Annual percentage GDP growth rate of Russia, 2008–2017

Economic sanctions:
The United States, the European Union and many other countries had imposed economic
sanctions on Russia following the start of the Russo-Ukrainian War in 2014, including
Russia's annexation of Crimea and the War in Donbass.[7] Despite the financial crisis,
international aid to Russia was not considered likely.[15][16] Economic sanctions contributed to
the decline of the rouble since some Russian oil companies have been prevented
from rolling over debt, forcing them to exchange their roubles for U.S. dollars or other foreign
currencies on the open market to meet their interest payment obligations on their existing
debt.[17]
The impact of the Western sanctions on Russian economy has been limited by design, since
the sanctions only affected a limited number of individuals and companies. Russian counter-
sanctions however reduced imports of food into Russia, which led to rising inflation and an
increase in food prices. As result, the average salary decreased[18] and the number of people
living under the poverty line increased.[19]

Falling Oil Prices

Russia’s economy is heavily dependent on crude oil and natural gas, especially
when it comes to state-owned giants like Gazprom. Between mid-2014 and early-
2016, crude oil prices have fallen from a high of $107.95 per barrel to a low of
$29.16 per barrel, cutting deep into the country’s major source of
revenue.2 Investors have responded by selling oil equities, while there are broader
concerns about the government’s ability to weather the storm.

The increased production of shale-based oil and gas in the U.S. could keep
pressure on prices over the long term in the $75 to $80 per barrel range. While the
Middle East initially kept production at a high to try and encourage shale
operations to shut down, OPEC leaders have since reversed course and have relied
on production cuts to boost prices. These dynamics helped crude oil prices
rebound from their lows made in early 2016 to reach over $50 by 2017.2

The upshot for Russia is that crude oil prices are experiencing upward pressure as
the global economy continues to show signs of recovery and OPEC has committed
to adhering to production cuts. While prices remain well below their highs made a
few years ago, they are also well above their lows made in early 2016 and appear
to be moving higher throughout 2017.

Other possible causes[edit]

Russia was ranked second in the world on The Economist's 2014 crony-capitalism
index[27] and first in their 2016 rankings. Russia was already near a recession before
the Crimean crisis, and Russia ranks low on the World Economic Forum's rankings of road
quality, technological adaptation, and burden of government regulation.[34] Russia's already-
weak economy left it less able to withstand the challenges imposed by low oil prices and
international sanctions.[35] The Russian Central Bank's "erratic response" to the falling rouble
has also been blamed for deepening the crisis.[
the Russian financial crisis (also called the ruble crisis or the Russian flu) began in Russia on
17 August 1998. It resulted in the Russian government and the Russian Central Bank
devaluing the ruble and defaulting on its debt. The crisis had severe impacts on the
economies of many neighboring countries
Bank's "erratic response" to the falling rouble has also been blamed for deepening the crisis.
[36]

Impact on Russia[edit]
On 16 December 2014, the RTS Index, denominated in U.S. dollars, declined 12%, the most
on any given day since the midst of the global financial crisis in November 2008, and
the MICEX Index declined 8.1% at one point before ending the day higher. This increased
the decline of RTS Index, up until 16 December, of nearly 30% during the month of
December.[59] In response to rising interest rates and bank runs, the interest rate on Russian
three-month interbank loans rose to 28.3%, higher than at any point in the Great Recession
of 2008.[60][61]
To get rid of the Russian roubles which were declining in value, many Russians chose to
purchase durable goods, such as washing machines, televisions, furniture, and jewelry, and
to convert their pensions and savings from roubles to US dollars and Euros.[62][63] Several
currency changers offered cash only at much greater exchange rates: USD up to 99.8 RUB
(official rate was 61.15)[64] and EUR up to 120–150 RUB (official rate was 76.15).[65][66]
Some foreign companies halted their business activities in Russia, including Volvo car
dealerships and the online stores of Apple and Steam, due to the high volatility and decline
of the Russian rouble.[63][67] Additionally, IKEA temporarily suspended sales of certain goods in
Russia, in part due to the volatility and in part due to a lack of adequate supply, as numerous
Russians bought IKEA furniture.[60]
Many Western financial institutions, including Goldman Sachs, started cutting the flow of
cash to Russian companies since they had restricted some longer-term rouble-
denominated repurchase agreements (repos). These actions were intended to protect
Western firms from the high volatility of the rouble. Repos had allowed Russian companies to
exchange securities for cash with Western financial institutions, so the restrictions added
pressure to the Russian financial system.[68]
Russia may also be excluded from the MSCI Emerging Markets Index, composed of 26
countries' indices, if capital controls or currency controls are implemented by Russia, since
such measures would make it more difficult for foreign entities to access Russian securities
markets. Russia would be reclassified as a standalone market in that event.[69]
The 20 December print edition of The Economist predicted that Russia would face the "lethal
combination" of a major recession and high inflation in 2015.[70] Others predicted that the
crisis would spread to the banking sector.[71] On the other hand, President Putin has argued
that Russia was not in crisis, and that cheaper oil prices would lead to a global economic
boom that would push up the price of oil, which would in turn help the Russian economy.[72]
On the week of 15 December, Russian gold and foreign currencies reserves were reduced
by "US$15.7 billion to below US$400 billion for the first time since August 2009 and down
from [more than] $510 billion at the start of the year."[73] Between 15 and 25 December,
annual inflation had climbed to more than 10%. Prices of goods, including beef and fish, rose
40 to 50% within a few months before the end of the year due to Russia's ban on Western
imports.[73]
In 2014, car sales in Russia fell by 12% from the previous year. The largest Russian oil
company, Rosneft, whose largest shareholding was owned by the British oil company BP at
the time, lost U.S. and European assets and 86% of profits in the third quarter 2014. Rosneft
attributed the decline to falling oil prices and rouble devaluation.[74]
The crisis threatened the continued existence of the Kontinental Hockey League, and
several teams missed or delayed payments to their players.[75]
Russian President Putin ordered Dmitry Medvedev's Cabinet to not take their day off on
2015 New Year's Day because of the crisis.[76][32][33]
As of December 2014, prices of meat, fish, and grain were inflated as a result of rouble
devaluation. Some businesses had closed down, especially in the far eastern region of
Russia's Siberia due to future rising lease fees.[77]
In the first 8 months of 2014 more Russians left the country than in any year since 1999.
[78]
Many start-ups and companies were seeking to relocate their businesses outside of
Russia.[78] The process that was labeled as "Excodus of tech".[78]
The state-owned gas company, Gazprom, lost 86% in the 2014 net income, dropping to
159,000,000,000₽ (US$3.1 billion), because of rouble devaluation, plunge on oil prices,
Ukraine crisis, and rising impairment costs. Overall revenues of the year grew 6.4% to PP
5.59 trillion ($106.3 billion).[79][80]
According to a September 2015 survey conducted by Nielsen Russia, 49% of around 1,000
sampled people had not visited a bar in 2015 mainly due to economic crisis; 46%, not a pub;
62%, not a nightclub. In comparison, according to a 2014 survey, 28% had not visited a bar
in the previous year, 2014; 32%, not a pub; 45%, not a nightclub. Survey conductors
concluded that rising prices in restaurants and bars had been factors to declining attendance
in those places.[81]
By the end of 2015 direct foreign investments in Russian economy fell by 92% and more
than 200 start-ups ceased to exist by closing down.[82]
Demographic consequences[edit]
Calculations presented by a group of demographers from the Russian Presidential Academy
of National Economy and Public Administration suggested the crisis could have very serious
demographic consequences (simultaneous growth of mortality and decline of fertility)[83]
As of March 2015, officially, three million Russians more than the previous year lived with
less than 9,662₽ (US$169) monthly income, totalling to twenty-three million.[84]
In 2016 over 330,000 Russian citizens applied for US permanent residency through
the Green Card lottery program, a 24% increase over the previous year.[85] According to New
World Wealth study, over 2,000 millionaires emigrated from Russia.[86]

Global financial markets[edit]

The financial crisis in Russia affected other global financial markets. U.S. financial markets
declined, with the Dow Jones Industrial Average down nearly 3% in 3 business days, in part
due to the Russian financial crisis.[87] The crisis drew comparisons to the 1998 Russian
financial crisis that affected global markets.[88] Economist Olivier Blanchard of the IMF noted
that the uncertainty caused by Russia's economic crisis could lead to greater worldwide risk
aversion in a manner similar to the Financial crisis of 2007–08.[50] However, the 2014
international sanctions on Russia decreased Russia's financial connections with the broader
financial world, which in turn lowered the risk that an ailing Russian economy would affect
the worldwide economy.[88] Since 1998, Russia and many other countries have adopted
a floating exchange rate, which could also help to prevent Russian financial woes from
affecting the rest of the world.[88]
Foreign exchange trading service FXCM said on 16 December 2014 it would restrict U.S.
dollar-rouble trading starting the next day, due to the volatility of the rouble. They also said
that most Western banks have stopped reporting the exchange rate of the U.S. dollar for
roubles (USD/RUB). Liquidity in the U.S. dollar-rouble market has also declined sharply.[68]
Financial institutions that hold relatively high amounts of Russian debt or other assets were
affected by the Russian financial crisis. The PIMCO Emerging Markets Bond Fund also had
21% of its holdings in Russian corporate and sovereign debt as of the end of September
2014, which declined about 7.9% from about 16 November 2014 to 16 December 2014.[89]
Companies from North America and Europe that heavily relied on Russian economy were
affected by the crisis. American car company Ford Motor Company experienced a 40%
decline in car sales in January–November 2014, according to Association of European
Businesses, and terminated "about 950 jobs at its Russia joint in April [2014]." German car
company Volkswagen experienced a 20% decline in the same period. American oil
company ExxonMobil alongside Rosneft was unable to continue an Arctic project after the
discovery of oil there due to sanctions over the crises in the Ukraine. British oil company BP
lost 17% of market share. French energy company Total S.A. shelved joint shale exploration
plans with Russian oil company Lukoil due to sanctions.[74]
German engineering company Siemens lost 14% of Russian revenue in 2014. German
sportswear company Adidas closed down stores and suspended development plans in
Russia. Danish beer company Carlsberg Group lost more than 20% of Russian shares.
American fast food company McDonald's closed twelve stores, which Russian officials said
was due to "sanitary violations". French food conglomerate Danone experienced a loss of
operating margins in the first half of 2014 due to rising milk prices.[74]
In January 2015, ratings agency Standard & Poor's lowered Russia's credit rating to junk
status and economic rating from BBB- to BB+.[90] Moody's followed this decision in February
2015.[91]
What can investors do?
The formal way to declare default is if 25 per cent or more of bondholders say
they didn't get their money.

Once that happens, provisions say all Russia's other foreign bonds are also in
default, and bondholders could then seek a court judgement to enforce payment.

In normal circumstances, investors and the defaulting government typically

negotiate a settlement in which bondholders are given new bonds that are worth
less but that at least give them some partial compensation.

However, sanctions bar dealings with Russia's Finance Ministry. And no one
knows when the war will end nor how much defaulted bonds could wind up
being worth.

In this case, declaring default and suing "might not be the wisest choice", Mr
Auslander said.

It was not possible to negotiate with Russia and there were so many unknowns,
so creditors might decide to "hang tight for now", he said.

Investors who wanted out of Russian debt have probably already headed for the
exits, leaving those who might have bought their bonds at knocked-down prices
in hopes of profiting from a settlement in the long run.
Reasons for the crisis:

The Russian financial crisis (also called the ruble crisis or the Russian flu) began
in Russia on 17 August 1998. It resulted in the Russian government and
the Russian Central Bank devaluing the ruble and defaulting on its debt.
The crisis had severe impacts on the economies of many neighboring
countries .The crisis happened because Russia was not able to pay back its debt. If
one ruble could value in more units of foreign currency of the countries to which it
owes, then paying back would be easier.
Since Russia had to provide assistance to other countries it had parted with after
the dissolution of the USSR, it did so by importing heavily from these countries. It
continued to import without any check on whether it had enough revenues to pay
back. In 1995, the IMF tried to help Russia stabilize unsuccessfully.

Russian economy since fall of the Soviet Union .

Financial consequences:

Inflation
Russian inflation in 1998 reached 84 percent and welfare costs grew considerably.
Many banks, including Inkombank, Oneximbank, and Tokobank, closed as a result
of the crisis.

Russian inflation rate 1993-2022

Banking
Bankers Trust suffered major losses in the summer of 1998 due to the bank having
a large position in Russian government bonds,[17] but avoided financial collapse by
being acquired by Deutsche Bank for $10 billion in November 1998.[18] This made
Deutsche Bank the fourth-largest money management firm in the world
after UBS, Fidelity Investments, and the Japanese post office's life insurance fund.

Agriculture
The main effect of the crisis on Russian agricultural policy has been a dramatic
drop in federal subsidies to the sector, about 80 percent in real terms compared
with 1997, though subsidies from regional budgets fell less.[19]
Recovery[edit]
Russia bounced back from the August 1998 financial crash with surprising speed.
Much of the reason for the recovery is that world oil prices increased rapidly
during 1999–2000 and Russia ran a large trade surplus in 1999 and 2000. Another
reason is that domestic industries, such as food processing, had benefited from
the devaluation, which caused a steep increase in the prices of imported goods.[21]
[22]

Also, since Russia's economy was operating to such a large extent on barter[23] and
other non-monetary instruments of exchange, the financial collapse had far less of
an impact on many producers than it would have had the economy been dependent
on a banking system. Finally, the economy was helped by an infusion of cash. As
enterprises were able to pay off debts in back wages and taxes, consumer demand
for goods and services produced by Russian industry began to rise.
k