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FiNMAG
18th January, 2015
Volume 8
Causes
Falling oil prices
The price of oil fell from $100 per barrel in June 2014 to
$47per barrel as on 17th January 2015 due to a drop in
global demand. In 2014, Russia needed an oil price of
$100 per barrel just to have a balanced budget.
Impact
GDP contraction in Russia
Fig 1: Oil prices from Aug14-Dec14
Source : NASDAQ
FiNMAG
and in the middle of the night hiked the key interest rate
by a tremendous 6.5 percentage points to 17 percent.
But that failed to stop the panic, with the rouble dropping by a further 20 percent. With the rouble having
now lost nearly 50 percent of its value against the dollar
in the past year imported food and consumer goods are
quickly becoming luxuries. That trend has begun and
inflation -- already close to ten percent -- threatens to
reach 15 percent in the coming months, thereby triggering fears of another stagflation.
High impact on weaker oil producers
Emerging markets that are producers of commodities
like oil are going to continue to get hurt, especially Venezuela, where oil revenues account for about 95 percent
of export earnings and the oil and gas sector is around
25% of GDP. Larger vulnerabilities still lie in the weaker
oil producers such as West Africa.
Spill over into emerging economies
Ordinarily, manufacturing-heavy economies that import
commodities, such as Thailand and Indonesia, benefit
from lower commodity prices, but thats not happening
indicating poor investor sentiment in emerging economies at the present, leading experts to ponder whether
the global economy is on the cusp of deflationary pressures.
Minimal impact on US and Europe
Outlook
Outlook on the Russian economy is optimistic based on
the assumption that the global price of oil will rise as
cheaper energy prices spur consumer spending and investment across the world. That will lead to higher demand for oil, which will push up the price. Some analysts
estimate that the price will recover to about $80 a barrel
next year. In the short term, this would be good for Russia, given its dependence on the energy sector. Also,
high oil prices over the past decade have allowed Moscow to pile up substantial hard currency reserves. Even
after having spent heavily to support the rouble, the
central bank's reserves still stand at around $400 billion.
Public debt is just over 10 percent of GDP. The budget
remains balanced and the government has a big rainy
day fund to draw upon to sustain social spending.
However, half of the Russian Federation's governmental
revenue comes from the sale of oil and gas. Russia's
economy suffers from Dutch disease, a term economists
use to describe a situation in which a country focuses on
developing its natural resources to the detriment of
other economic activity. In the long term, though, it is
essential that the country tackle some of the economic
challenges it has ducked for the past couple of decades
including the development of alternate sources of economic activity thereby reducing dependence on hydrocarbons.
References:
Impact on Asia
http://www.economist.com/blogs/economistexplains/2014/12/economist-explains-16
http://en.wikipedia.org/wiki/2014%E2%80%
9315_Russian_financial_crisis
http://www.bloombergview.com/articles/2014-11-10/howclose-is-russia-to-financial-crisis
http://www.telegraph.co.uk/finance/economics/11296233/
Russian-economic-crisis-live.html
http://www.aljazeera.com/programmes/insidestory/2014/12/
inside-story-russia-economic-crisis2014122185119161740.html
Volume 8
Volume 8
Inflation
The consumer price index inflation has been easing
since July 2014. The path of inflation, while below the
expected trajectory, has been consistent with the assessment of the balance of risks in the Reserve Bank's bi
-monthly monetary policy statements. Lower than expected inflation has been enabled by the sharper than
expected decline in prices of vegetables and fruits since
September, ebbing price pressures in respect of cereals
and the large fall in international commodity prices, particularly crude oil.
Fiscal deficit target
Rajan has acknowledged the government's assurance of
sticking to its fiscal deficit target of 4.1% in the current
Bond yields fell sharply. The benchmark 10-year bond yield fell 5 basis
points to 7.93 percent on the news.
It had hit a near 1-1/2 year low of
7.82 percent in mid-December
Low oil prices would reduce inflation and the oil import bill, which
was $160 billion last year and is
likely to be around $100-110 billion this year
RBIs move will boost investor sentiment and revive growth, It also
sparked a hope that it will further
bring down interest rates to lower
the cost of capital for the industry.
Volume 8