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Must-know: Will the Russian economy crash like the Boeing 777?

Part 2
Must-know: Will the Russian economy crash like the Boeing 777? (Part 2 of 12)

Must-know: The current state of the Russian economy

Russia’s economy

With its resource-rich landscape, Russia is the world leader in oil production. Russia is home to most of the largest oil and gas companies including Gazprom (OGZPY), Lukoil (LUKOY), Rosneft (OJSCY), and Novatek (NOVKY). Russia also has the largest petroleum industry in the world. Russia’s global dominance includes:

Russia GDP, constant prices (per cent change)Enlarge Graph

  • Russia’s petroleum industry is the largest in the world.
  • Russia has the largest proven reserves of natural gas, which also makes it the world leader in natural gas export.
  • Russia has the second largest coal reserves.
  • It also has the eighth largest oil reserves in the world. Considering this, being first in oil production only showcases Russia’s efficiency in regards to oil production.

Lack of investment leading to economic slowdown

However, the Russian oil industry claims to be in need of huge investment. In fact, the Russian economy is currently facing a slowdown due to a lack of investments. The economy, that had started to struggle even before the Ukrainian crises emerged, has seen its growth dwindle over the last few months. Additionally, the increasing sanctions being imposed on it, after it forcibly annexed Crimea from Ukraine and continued to daunt eastern Ukraine to grab more land under its regime, have made the economy weaker.

In April, the International Monetary Fund (or IMF) discussed Russia and said “Investment will further contract due to the uncertainty around the geopolitical situation. While still strong, the pace of consumption growth—supported by wage and credit growth—has begun to slow.”

Growth rate has slumped, sovereign rating cut

As a result, the International Monetary Fund (or IMF) forecasted that the growth rate of the Russian economy would slump to 0.2% this year. Compared to the 1.3% growth rate at which the Russian economy grew in 2013, this is quite reflective of the weakness that has crept into the economic and financial situation of the country.

On April 25, Standard & Poor’s, a McGraw Hill Financial Inc. (MHFI) company, cut Russia’s rating to BBB-, a notch above junk level citing heavy outflows of capital as posing increased risk of deterioration in external financing. To learn more about this downgrade read our previous article, Must-know: What allows Russia to step away from issuing bonds?

The three woes

Specifically, the economy slowed sharply in the first three months of 2014, recording a 0.9% annualized growth rate versus a 2% recorded in the 4Q13. This was a result of plummeting investor and business confidence due to the crisis in Ukraine that was caused by Russia. The three woes that have inflicted the country include:

  1. Investments have been and are being withdrawn on account of uncertainty and a receding economy.
  2. The Russian currency, Ruble, has depreciated making imports expensive for Russia.
  3. Inflation has increased.

Considering that the Russian economy has already been ridden by the three woes, the newly imposed sanctions by the U.S. and the European Union (or EU), have further added to the gravity of the Russia’s current economic situation. The next section in this series analyzes the impact that the newly imposed U.S. sanctions could have on Russia.

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