Russia’s Twin Troubles

By+Yu+Lintao

The Christmas holiday brought welcome relief to the embattled ruble as Russian Finance Minister Anton Siluanov announced on December 25， 2014 that the nations currency crisis had ended. The ruble traded at 53.9 per U.S. dollar during the evening of that day， a sharp rebound from its recent alltime low of 80.

For the past months， Russias economic foundation has been severely undermined due to the twin troubles of falling crude oil prices on the international market and rolling rounds of Western sanctions. Partly due to reactions to the crisis in Ukraine， the ruble recently saw the sharpest drop in 16 years. The fall of the ruble has prompted panic buying of foreign currency in Russia and a spike in deposit withdrawals， heaping pressure on a vulnerable banking sector whose access to international capital markets has already been restricted by Western sanctions. In the meantime， the large drop of energy prices has also caused a severe blow to the Russian economy， as oil and gas exports comprise around 50 percent of its fiscal revenue.

To turn the deteriorating situation around， the Russian Government has taken steps to support key banks and address the deepening economic recession in recent weeks， including a sharp and unexpected interest rate hike. Now， the measures are seemingly taking effect. Observers claim that Russia must address its fundamental economic flaws， adding that in the meantime， the continued sanctions on Russia hurt all.

No real crisis

Since the beginning of the rubles sharp depreciation， the Russian Government has adopted multiple approaches in response. While Russias central bank raised benchmark interest rates to curb the current inflation， Moscow also imposed informal capital controls， including orders to large state-controlled oil and gas exporters Gazprom and Rosneft to sell some of their dollar revenues to shore up the ruble. In the meantime， the Russian Government has significantly scaled up rescue funds for the banking sector. It has announced providing up to $2.4 billion in loans to bail out the Trust Bank， the first bank to fall victim to the crisis. In addition， the country is also planning to tax food exports in order to keep prices in check and ensure food security in Russia.

The series of steps has fostered the rubles temporary stability. However， observers believe that Russias difficulties stem mainly from its flawed economic structure， rather than merely problems brought about by West-imposed sanctions and the overall international environment.

Cheng Yijun， a senior researcher with the Institute of Russian， East European and Central Asian Studies under the Chinese Academy of Social Sciences， said that though severely hit by Western sanctions， the major problem of Russias economy is its lack of structural diversity and excessively heavy reliance on the energy sector， leaving it vulnerable to fluctuations of international energy prices.

As a major energy exporter， Russia has been counting on oil and gas exports to provide nearly half of its fiscal revenue.

Chen Yu， a research fellow at the China Institutes of Contemporary International Relations （CICIR）， echoed Chengs view by adding that restructuring the Russian economy does not mean fully dropping energy-oriented development， but rather consists of attaching more importance to exports of non-energy sectors and boosting domestic manufacturing.

Cheng claimed that although Russias economy is seemingly chaotic， it is far from crisis mode. “Compared with the crises in 1998 and 2008， Russias current economic condition is much better，” Cheng said.

According to Cheng， Russia now has a large foreign exchange reserve totaling as much as$370 billion that can be used to combat financial risks. In addition， the economic difficulties have not caused political instability in Russia—on the contrary， the Russian people have stayed calm in spite of the economic troubles.

Although it would be difficult to change Russias heavy reliance on energy exports in a short time， the Russian Government has now begun taking measures for economic restructuring， as well as substituting imported products such as military hardware components and food. In a recent cabinet meeting， Russian Prime Minister Dmitry Medvedev urged ministers to focus on supporting the innovation sector as a way to cut the countrys dependence on imports and facilitate a solution to current economic woes.

Double-edged sword

As the ruble underwent a sharp depreciation， U.S. President Barack Obama signed an executive order on December 19， 2014 to start a fresh round of sanctions on Russia， imposing a ban on new investment in Crimea and barring the export or import of goods， technology or services with the region. On the same day， Canadian Prime Minister Stephen Harper also announced restrictive measures on the export of technology in relation to Arctic， deep-water and shale oil explorations and extraction to Russia. And one day before， the EU unleashed similar sanctions on Moscow. The new punitive measures will undoubtedly further strain Russias economic woes as they jar investors， leading to capital flight.

Russia sees the latest moves of Western countries as evidence that they lack willingness to settle the Ukraine crisis.

Though the rounds of sanctions have severely wounded Russias economy， it seems that they have also helped cement President Putins status in Russian politics with his favorability rating reaching a new high. A recent Associated Press-NORC Center for Public Affairs Research poll found that about 80 percent of Russians support him.

Under pressure from the West， Putin called the sanctions an opportunity for Russias economic transition. At his 10th annual year-end press conference on December 18， 2014， Putin claimed that the current situation can be used to offer additional conditions for production businesses， which would help spur the diversification of the Russian economy.

“External conditions urge us to be more effective and shift to more innovative development patterns，” Putin said.

Chen of the CICIR noted that Russia will not yield to Western sanctions and Putin will continue his hardline stance and will raise a wave of patriotic fervor in his country to pull through the economic hardship in the next one or two years.

Regarding the Ukraine crisis， Chen added that Moscow might take a tougher stance， making the crisis more difficult to resolve.

In addition， He Maochun， Director of the Research Center of Economy and Diplomacy under Tsinghua University， noted that Western sanctions as well as the deterioration of Russias economy will surely have negative effects on the economic development of the West.

In the face of the threat of new sanctions， Russia has vowed to take retaliatory measures. Putin has already announced that Russia will ban or limit the imports of agricultural and food products from EU countries. Moreover， during his visit to Turkey in early December 2014， the Russian president played an “energy card，” warning that the planned South Stream Offshore Pipeline project， which will supply gas to Europe through Turkey， would be canceled.

According to European Commission statistics， if Russia takes counter-sanction actions， the EU will lose 50 billion euro （$62 billion） this year， compared with 40 billion euro （$49 billion） in 2014. And if Putin plays the “energy card”again， energy-strapped EU countries will suffer even more.

Washington cannot be a complete winner in the game of sanctions against Russia. As Russia has acted as an important partner of the United States for combating extremist forces in the Middle East and in solving the Iranian nuclear issue， the current circumstances will undoubtedly weaken the joint international endeavor to cope with global security challenges.

Squeezed by the West， Moscow is seeking opportunities in the East. On January 1， 2015， the Eurasian Economic Union（EEU） officially came into being. First initiated by the leaders of Belarus， Kazakhstan and Russia， the EEU is aimed at establishing an economic bloc for the free movement of goods， services， capital and labor. The union will create a single economic market of 183 million people with a gross domestic product of over $4 trillion.

Analysts said that against the backdrop of Western sanctions， the EEU will be of great significance for Russia to drag its economy out of the doldrums. The new bloc not only can provide Russia a big market for its products， but also help the country attract a cheaper workforce. Whats more， the EEU can also facilitate Russias economic and trade ties with more countries， as it has been negotiating with Viet Nam， Israel， Turkey， India and Uzbekistan over free trade agreements.