What happened to the Russian Economy? A Sad story By Dr. Bobby Srinivasan and Dr. Sudhakar Balachandran

March 13, 2015 | Posted by bobbysrinivasan << back to blog

Long gone are the days of the much celebrated emerging economies growth which are currently replaced by painful deflation and recession in some of them. Let us start with Russia, It’s a $ 3.5 trillion economy has witnessed a lethal combination of deep recession and runaway inflation. The Russian Ruble which was 32 collapsed to a high of 70 to a US dollar. The short-term interest rate was pushed by their monetary authorities by 650 basis points to prevent the currency from collapsing. Their foreign reserves fell from a high of $ 511 billion to $ 188 billion US dollars in less than a year. In plain and simple terms, the Russian economy is in shambles. Their Central Bank is forecasting a minus 4.5 percent growth for the current financial year and the budget deficit is also expected to increase. Their leader President Vladimir Putin said and I quote “the hardship we are facing are not only external, they are caused by the external sanctions restriction or restriction linked with the international situation, they are also caused by our mistakes that have been made over the years”. It is amazing as to how a leader of a mighty country have accepted mistakes in their economic and political policies.

The story of BRICS is turning out to be red. The BRICS comprising Brazil, Russia, India, China and South Africa has almost 40 percent of the world population. As of 2014 BRICS represented 18 percent of the world economy with a combined foreign reserves of 4 trillion US dollars. Now look at the Russian citizens, they are giving up their hope of an immediate future economic growth. They are dumping their local currency and rushing to buy the US dollar. The Russian government has an outstanding of $ 11 billion Ruble denominated debt and $ 60 billion US dollar debt. The bond yields have recently touched 15 percent. Finally, this Ruble collapse will also hit the new BRICS development bank both financially and strategically.

Where do we go from here? – With the Euro zone and Japan are in severe deflation and the US economy achieving a spectacular 5 percent growth in Q3 2014, all the monies will rush to the US to benefit. This will reverse the flow of funds from the BRICS countries stalling their economic growth further. It appears as though every country is chasing investment funds to achieve the desired economic growth. This time around these funds will give a miss to Brazil, Russia and possibly South Africa. Given that the Indian economy has immense potential to grow, our government should convince the global financial market that we are ready to do business like what China did over the last 30 years. Let us hope the miracle happens.

Let us look at the story of Brazil. Recently, their currency has seen a massive drop in value against the US dollar and their economy has come to a grinding halt with a possible economic growth of less than 1 percent this year. Similarly the South African economy has accepted marginal growth with their currency hitting a low of 12 Rand to dollar a large double digit depreciation against the almighty US dollar.

For India, the impact of Russian Ruble collapse is real. Our pharmaceutical companies trade big time with Russia and their currency depreciation will affect the inflow of US dollar. Similarly the Russian energy exports to India will be affected significantly. China has just announced a 7.4 percent growth for the FY 2014 and this is much lower than the 7.6 percent growths in FY 2012 and 2013. They have massive commitment to build gas pipelines worth several hundred billion dollars. The fall in the value of Ruble against the dollar may have a big impact on the cost of the project.

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