Is Russia in a deep economic crisis?

Question

Premise: I see that the site is for professional and academic economicists, and I'm neither. However, since I've been participating to other SE sites for some time now, I consider SE a trusted source, and reading here I think my question is on-topic, thus I'll take my chance and ask.

I was talking about Russia at work, and a coworker started saying that Russia is, and has been for a lot of time, in a deep economic crisis, nearly on the verge of bankrupcy. This guy is used to pretending he knows all about everything, thus I don't trust him. But, come to think of it, I noticed that I know very little about Russian economy: I don't know if it has a large national debt, who's the owner of that debt (Russians or other states?), whether it has a positive or negative trade export, etc.

On one hand, I guess Russian economy must have taken a blow from the failing oil prices, because lower prices => less profits for exporters like Russia (right?) and also because cheaper oil => less market for gas, which Russia also exports. However, shouldn't this be compensated by higher oil exports because of the lower price? I'm getting a bit confused here. Also, sanctions against Russia must take a toll on its economy.

On the other hand, Russia is considered a big international power. It has a lot of natural resources, and one of the strongest armies in the world. It seems weird to me that a nation "on the verge of bankrupcy" could mantain such a military power. Is my coworker really mistaking Russia for old Soviet Union? Or is he right, and Russia is actually down to its feet in a dramatic crisis?

Answer 1

The Russian economy has been in an recession since 2014, when oil prices plumited. The Russian debt to GDP ratio is still very low though: below 20%, compared to over a 100 for the United States. This is because Russia had a huge stash of cash before the recession, which has shrunk from over 91 billion in 2014 to 32 billion. If this trend continues at some point they will have to start borrowing money to pay for expenses. But I don't see them going bankrupt anytime soon, because their debt to GDP ratio is so low so investors will lend them money against low interest rates.

Answer 2

I encourage you to look into the recent economic sanctions that have been placed on Russia, it has put a huge strain on Russia's ability to borrow money from abroad and is a huge contributor to their dire situation.

You know that GDP= C + I + G + (X-M) and just how interconnected all of these factors are.

We would think that the height of the Russian economy was in 2008 during which their economy was growing at 7% a year that investment would reflected their expectation to continue to grow at that level. It would not, collapsing demand of a major industry (petro and gas constituted half of its budget revenues and 70% of its exports lie in hydrocarbons) lead to drastic decline in government revenue -G is declining. From 2014 to 2016, their energy revenues have continued to decline from 7 trillion rubles to 6 trillion rubles despite massive inflation that could still be within the double digits for CPI in 2016.

Why is inflation increasing? One reason it has been so high is that during the currency devaluation, Russia banned imports in some key categories such as food (this point is relevant later when we discuss consumer's fear of inflation as a cause of shortages of essentials) causing this increase in prices.

What effect does this inflation have on the Russian economy in a basic sense? Let's start with consumer behavior; high inflation is known to distort it as individuals in fear of continued price hikes and diminishing purchasing power they will stock up on essential goods. Here is a link to an article that determines if shortages can be predictors of long term inflation. Secondly, it affects the fixed income earners and those that lack control over their wage levels, this is more often than not, the poorest individuals in society that will hurt the most. In order to combat this high inflation rate and in order to maintain a ROI we would expect the interest rates to rise. By god has it; the Russian Central bank's interest rate stands at 10.5%.

The economist reported that Russia's gross fixed investments have dropped from $197 billion to $126 billion yearly in the last four years. If we simplify it down, then each year we expect that a country must at least offset their depreciation of assets in order to remain at least at the same level of production. You then have to dive a bit into estimating the depreciation of assets within the Russian economy, they currently break it down I think into 7 categories of depreciation. These rates of depreciation range from 10%-30% amongst assets in the groups 3-7. If I had information on the asset value in each of these depreciation it would be easier but with depreciation of assets and the steep decline of investments there should be sharp drops in the production capacity of the Russian economy that could last for years while businesses struggle to finance investment as their economy begins to rebound as the sharp decline of the rubble in exchange markets spurs exports further. As another barrier I expect that investment will continue to decline as the central bank's 10.5% interest rate and uncertainty amongst consumer demand makes it hard to justify further investment for businesses.

Its tough out there, this is probably why the Russians were toasting to Donald Trump the other day in hopes to mend relations and relax the sanctions that were placed on them.

I wish I had more time to make this clearer and to drilldown on more points but I simply don't have any time; hopefully it spurs you to look into things further.