Russia Is Falling Into A Recession

Tomas Hirst

Russia's Economy Ministry has downgraded its GDP forecast for the country in 2015 from 1.2% growth to a 0.8% contraction. In other words, the country is falling into a recession.

The net amount of foreign capital expected to flow out of the country in 2014 has been revised sharply upward to $125 billion (up from $100 billion), while the projection of net outflows for next year has also been increased, to $90 billion from $50 billion.

The independent Russian news agency Interfax reports Deputy Economic Development Minister Alexei Vedev as saying that the downgrade reflects the decrease in the forecast average price of Urals crude next year from $100 a barrel to $80 a barrel.

Russia relies on the oil and gas sector for 10% of its GDP and about 50% of its government budget. However, since June global oil prices have been in free fall, with Brent falling from a June high of about $115 a barrel to just over $72 a barrel on Tuesday. The majority of forecasters now suggest that it will remain under $100 a barrel through 2016.

These concerns have helped drive capital out of the country and force down the value of the Russian ruble against other major currencies. Indeed, the ruble has closely tracked the collapsing oil price over the past six months:

Despite a modest rally in early trading Tuesday, as further falls in oil prices compounded, news of the downgrade sent the currency tumbling by more than 4% to almost 54 rubles to the dollar at the time of writing.

The falling value of the currency poses a significant threat to Russian businesses, which are due to spend about $35 billion in foreign-debt repayments this month and over $100 billion next year. As Timothy Ash of Standard Bank put it Monday:

"I would think that many entities will be struggling with debt service costs on FX loans at these levels for the ruble."

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