Ruble crisis exposes Russia's economy

The Russian central bank’s steep hike of interest rate from 10.5 per cent to 17 in one stroke last week was a drastic response to an extremely difficult financial situation. Central banks do not usually act so suddenly and make such huge changes.

Half a percentage change is the norm most times. But the crisis faced by the Russian economy is such that even the big central bank action had no great impact on it. The bank had acted after the ruble tumbled badly in the last few weeks.

In less than two weeks, its value fell from 52 rubles for a dollar to 80. Inflation was already raging at about 10 per cent and many shopkeepers started marking up their prices daily. The continuing crisis has also had its impact on the world economy and financial markets with stocks tumbling and trade being hit.

It has been pointed out that the oil industry in Russia is mismanaged by politically influential persons. The rule of law is weak and corruption is high. Russia will have to diversify its economy, improve manufacturing and introduce modernisation and high technology in all areas to improve productivity. Russia’s growth rate is less than one per cent. The persisting crisis may push it into recession in the near future.

Investors are moving away and global institutions like the IMF may not come to Russia’s aid for political reasons. Russian economy is important because it is the world’s fifth largest and its failure will have implications beyond its borders. The lessons from the crisis are also useful for other countries which depend too much on exports.

The main reason for the run on the ruble was the recent precipitous fall in crude prices. Russia is highly dependent on oil and gas exports, which had given it a decent current account surplus, reduced its fiscal deficit and given it a good credit rating. But the almost 50 per cent fall in crude prices has eroded about 4.5 per of the GDP.

The sanctions imposed by western countries in the wake of the political problems in Ukraine and Russian actions there have also hurt the economy. The present crisis is a reminder of the economic chaos after the break-up of the Soviet Union, when Russia defaulted on loans. Petroleum exports and the political stability under President Putin helped the country to turn the corner. Putin is still strong and popular even in the midst of the crisis, but it has exposed the extreme vulnerability of the economy.