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Russian Economy Today: Major 
Risks and Challenges 
November 12, 2014
Kievan Rus 
• Kiev originally the center 
of Rus, a federation of 
East Slavic tribes, ca 882- 
1240 
• 1223: invasion of the 
Mongols 
• 1240: Total destruction of 
Kiev, end of Kievan Rus 
• 1480: end of the 
Mongolian domination
Grand Moscow Duchy 
• Late medieval state centered on 
Moscow, 1283-1547 
• Moscow first mentioned in a 1147 
chronicle 
• In 1547 Ivan the Terrible 
proclaimed the Tsardom of Russia 
• Ukrainian lands dominated by 
Polish and Lithuanians from the 
end of Mongol rule in 1480 
• Crimean Khanate established in 
1449, existed until 1783: neither 
Russian nor Ukrainian
Tsardom of Russia 
• 1547-1721 
• Grew 35000 sq.km. a year 
• 1654: Bogdan Hmelnitsky, 
a Ukrainian leader, 
offered the Tsar to make 
Ukraine part of Russia to 
avoid Polish domination
New Russia 
• 1764: Russia 
conquers the lands to 
the North of Black 
Sea from the 
Ottoman Empire 
• The new region is 
called New Russia, 
active migration by 
Slavs: Russians and 
Ukrainians 
• 1783: Russia annexes 
Crimea after 
defeating Crimean 
Khanate
The Soviet Time 
• 1917: Communist revolution in Russia 
• 1918: Ukraine proclaims an independent Ukrainian Socialist Republic 
• 1922: the USSR formed that included Russian Federation, Ukrainian Socialist 
Republic (formed in 1918), Belarussian Socialist republic, and Transcaucasian 
Socialist republic 
• Ukraine becomes an autonomous republic within the Soviet Union 
• 1954: Crimea transferred from the Russian Federation to Ukraine 
• 1991: Collapse of the Soviet Union, Ukraine’s independence
Ukrainian Crisis 
• 21 November 2013: President Yanukovitch backs out of signing the 
Association Agreement with the EU, accepts $15bn loan from Russia 
• 22 November 2013: Protests break out in Kiev, the capital 
• 20 February 2014: large-scale clashes between police an protesters 
• 21 February 2014: Peace agreement signed between opposition leaders 
and Yanukovitch, also signed by Foreign Affairs ministers of Germany and 
Poland 
• 22 February 2014: Radical opposition leaders refuse to recognize the 
peace agreement, make Yanukovitch leave Kiev 
• 23 February 2014: Turchinov proclaimed enacted President of Ukraine 
• 23 February 2014: Law granting Russian the regional status language 
abolished 
• 27 February 2014: Crimean parliament decides to declare independence 
• 16 March 2014: referendum in Crimea on independence 
• 18 March 2014: President Putin signs a decree on Crimea re-joining Russia
Sanctions: History 
• First Round: 
– Immediately after March 16, 2014 following on Crimea’s joining 
Russia 
– Target: individuals banned from visiting EU, Canada, the US; 
doing business is also prohibited with them 
• Second Round: 
– April 28, 2014 
– Further visa bans, 17 Russian companies 
• Third Round: 
– July 17, 2014: Malaysian MH17 crash 
– Government-owned Russian banks, trade restrictions on 
defense industry, additional visa bans 
– Inability to borrow for more than 30 days
Ruble Depreciation 
RUB/EUR 
RUB/USD 
• Depreciation by 23% (RUB/USD), 
14% (RUB/EUR) 
• Most depreciation occurred after 
the third (sector) round of 
sanctions 
• Capital flight due to increased 
geopolitical uncertainty 
• Exports did not grow 
proportionately to ruble’s 
depreciation due to global 
economic slowdown 
• Ability to borrow abroad restricted 
by sanctions, limiting supply of 
foreign currency
Inflation Acceleration 
• Inflation picked up significantly shortly after the first round of sanctions 
• Inflation rate kept roughly at or below the similar inflation level of 2008, the year 
of the global crisis 
• January--September 2014: 6.27% 
• January—September 2008: 10.57%; January-September 2013: 4.72%
Capital Flight 
• Sharp increase in capital outflow in January 2014 was attributed to looming Western sanctions 
• Capital outflow is not much different relative to the average of previous years 
• Capital outflow does not increase dramatically as sanctions mount 
• Capital outflow is probably more the result of Russia’s structural problems rather than sanctions
Russian Stock Market Response 
March 2014 
Sanctions 
September 
1995 
March 
2004 
March 2014 
Sanctions 
August 
2008 
3 November 
2014 
• RTSI grew 
after the first 
round of 
sanctions 
• Market as a 
whole 
appears to be 
ranging 
• 2008 crisis 
had much 
larger 
negative 
effect 
Source: RBK quote.rbc.ru
Russia’s Food Imports Ban 
• Import ban on food imports from the EU, US, Canada, and 
Australia seems most important response so far (7 August, 
2014) 
• In August alone 
– Moscow food prices up by 7% 
– St. Petersburg, 10% 
– Pork and chicken prices up by about 25% 
• Poland, Finland and Lithuania most affected by the Russian 
food ban
Abolishing Bilateral Corridor on 
November 10, 2014 
• The Ruble was allowed to 
move within bounds for a 
bilateral currency basket 
prior to the sanctions 
• Corridor bounds were 
adjusted tens of times since 
the start of 2014 
• Discount rates increased 
three times since January 
2014 
• Interventions until 2015 
only at the bounds 
• Floating exchange rate 
introduced in 2015 
Source: Roskomstat
What Measures Would Really Hurt 
the Russian Economy? 
• Restrictions on gas and oil exports 
• Exclusion from financial networks: VISA, 
Mastercard, SWIFT etc 
• Persuade OPEC to increase oil production
Oil and Gas in the Russian Economy 
Budget crucially depends on 
the oil-gas revenues 
30% of all Russian gas 
production is meant for exports 
Rising energy prices increased oil-gas 
revenue component of the Russian 
budget without any growth in the 
physical volumes 
Non-oil deficits persisting
Oil Price Evolution 
If the trend 
continues: 
•Further 
deterioration of the 
government budget 
•Depreciation of 
the ruble 
•Further pressure 
on the National 
Welfare Fund to 
finance budget 
deficits  risk of 
social unrest 
(2018?)
EU’s Dependence on 
Russian Energy Supplies 
EU depends on about 
1/3 of its energy 
consumption on 
imports from Russia: 
•34% crude oil 
•26% solid fuels 
(mainly coal) 
•32% natural gas 
Germany, Italy, and 
Eastern European 
countries are the most 
vulnerable importers
EU and Russia’s Dependence on 
Ukrainian Transit 
RU GE 
POL BR 
UKR 
TRK 
SW FI 
North Stream 
South Stream 
• 42% of Russian gas exports 
depends on Ukrainian 
transit 
• Ukraine’s inability to pay 
the contracted prices led 
to gas supply shortages in 
2006 and 2009 
• Ukraine’s current debt 
reached $5bn 
• To avoid dependence on 
Ukraine, Russia started 
constructing the North 
and South Stream pipe 
routes
Gas Dependence and Sanctions 
• One way to really hurt the Russian economy is to 
limit her gas and oil exports 
• Cutting Russian gas and oil imports is: 
– Difficult since alternative suppliers are difficult to find 
– Politically impossible since the voters will not 
welcome electricity and heating shortages 
• Therefore, the most potent measure to ‘punish’ 
the Russian economy will not be taken in the 
foreseeable future
Other Potent Sanctions 
• Ban VISA, Mastercard etc from doing business 
with Russia 
– Private companies are unwilling to lose their business 
– Byron Pollitt, VISA’s CFO, in April 2014: 
• "We are caught between the politics of the United States and the politics of Russia. We're clearly seeing a drop-off in 
cross-border volume, and sanctions are expected to have some impact on volume." 
• "We have 100 million cards there and it is not in anyone's best interest, inclusive of the Russians, to make those cards not 
available to their own citizens.” 
• Exclude Russia from financial networks e.g. 
SWIFT 
– Applied to Iran in 2012 
– May be difficult to apply to Russia since that would 
hurt EU’s trade with Russia, including energy import 
deals
SWIFT Statement 
SWIFT Statement: http://www.swift.com/about_swift/shownews? 
param_dcr=news.data/en/swift_com/2014/PR_swift_sanctions_statement.xml 
Brussels, 6 October 2014 - SWIFT and its stakeholders have received calls to disconnect institutions and 
entire countries from its network – most recently Israel and Russia. 
SWIFT is a neutral global cooperative company set up under Belgian law. It was established by and for 
its members to create a shared worldwide messaging service and a common language for international 
transactions. SWIFT provides services to over 10,500 financial institutions and corporations in over 200 
jurisdictions around the world. SWIFT is a critical service provider to the financial industry and plays a 
pivotal role in supporting international commerce and trade. 
SWIFT services are designed to facilitate its customers’ compliance with sanctions and other 
regulations, however SWIFT will not make unilateral decisions to disconnect institutions from its 
network as a result of political pressure. 
SWIFT regrets the pressure, as well as the surrounding media speculation, both of which risk 
undermining the systemic character of the services that SWIFT provides its customers around the 
world. As a utility with a systemic global character, it has no authority to make sanctions decisions.
Economy Near Potential Output 
• Growth rate of 7% prior to the crisis of 2008 
– High carbohydrates prices 
– Spare capacity 
• Growth rate of ~1% during 2009-2013 
– ~5% for similarly large emerging economies 
– ~3% for resource-rich countries 
• Currently 
– Weak credit growth 
– Slow rate of new business creation 
• Structural problems, not cyclical ones, mostly constrain the 
expansion of potential output
Resource Rents and Red Tape 
• Resource-rich countries are prone to high resource rents 
– Short-termism 
– High extent of reliance on subsidies and transfers 
• Red tape restrictions 
– Far Eastern tuna / sanctions 
– Incumbent bureaucracy has few incentives to promote 
competition 
• Importance of performance-oriented public sector 
– Weaning bureaucracy off the resource exports revenues 
– Linking size of compensation to performance indicators
Oil/Gas and Hard Budget Constraints 
• Carbohydrates-based growth ensures persistence of soft budget 
constraints 
– Janos Kornai (Econometrica, 1979) 
– Bailing out loss-making state enterprises during the Soviet time 
– Source of government transfers and subsidies to pay for social 
obligations e.g. pensions currently 
• Hard budget constraints 
– Shown to increase aggregate production efficiency 
– Are spurred by 
• US/EU sanctions 
• Dwindling oil prices 
– Are Russia’s chance to diversify its economy away from being a 
carbohydrate-oriented one
Diversification 
• Tangible assets: not a major problem 
– a wide range of industries 
– decent GFCF rates 
– Improving infrastructure 
• Intangible assets: institutional framework 
– MAJOR problem 
– Contract law 
– Independent courts 
– Police corruption 
– Accountable public sector 
• Geographical 
– Decreasing extent of dependence on EU for hard currency flows 
– Reorientation to emerging Asian markets, specifically China 
• “Power of Siberia” 
• Transsiberian link to Korean railway networks 
– Payments in rubles/yuan

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Apresentação - "Russian economy today"

  • 1. Russian Economy Today: Major Risks and Challenges November 12, 2014
  • 2. Kievan Rus • Kiev originally the center of Rus, a federation of East Slavic tribes, ca 882- 1240 • 1223: invasion of the Mongols • 1240: Total destruction of Kiev, end of Kievan Rus • 1480: end of the Mongolian domination
  • 3. Grand Moscow Duchy • Late medieval state centered on Moscow, 1283-1547 • Moscow first mentioned in a 1147 chronicle • In 1547 Ivan the Terrible proclaimed the Tsardom of Russia • Ukrainian lands dominated by Polish and Lithuanians from the end of Mongol rule in 1480 • Crimean Khanate established in 1449, existed until 1783: neither Russian nor Ukrainian
  • 4. Tsardom of Russia • 1547-1721 • Grew 35000 sq.km. a year • 1654: Bogdan Hmelnitsky, a Ukrainian leader, offered the Tsar to make Ukraine part of Russia to avoid Polish domination
  • 5. New Russia • 1764: Russia conquers the lands to the North of Black Sea from the Ottoman Empire • The new region is called New Russia, active migration by Slavs: Russians and Ukrainians • 1783: Russia annexes Crimea after defeating Crimean Khanate
  • 6. The Soviet Time • 1917: Communist revolution in Russia • 1918: Ukraine proclaims an independent Ukrainian Socialist Republic • 1922: the USSR formed that included Russian Federation, Ukrainian Socialist Republic (formed in 1918), Belarussian Socialist republic, and Transcaucasian Socialist republic • Ukraine becomes an autonomous republic within the Soviet Union • 1954: Crimea transferred from the Russian Federation to Ukraine • 1991: Collapse of the Soviet Union, Ukraine’s independence
  • 7. Ukrainian Crisis • 21 November 2013: President Yanukovitch backs out of signing the Association Agreement with the EU, accepts $15bn loan from Russia • 22 November 2013: Protests break out in Kiev, the capital • 20 February 2014: large-scale clashes between police an protesters • 21 February 2014: Peace agreement signed between opposition leaders and Yanukovitch, also signed by Foreign Affairs ministers of Germany and Poland • 22 February 2014: Radical opposition leaders refuse to recognize the peace agreement, make Yanukovitch leave Kiev • 23 February 2014: Turchinov proclaimed enacted President of Ukraine • 23 February 2014: Law granting Russian the regional status language abolished • 27 February 2014: Crimean parliament decides to declare independence • 16 March 2014: referendum in Crimea on independence • 18 March 2014: President Putin signs a decree on Crimea re-joining Russia
  • 8. Sanctions: History • First Round: – Immediately after March 16, 2014 following on Crimea’s joining Russia – Target: individuals banned from visiting EU, Canada, the US; doing business is also prohibited with them • Second Round: – April 28, 2014 – Further visa bans, 17 Russian companies • Third Round: – July 17, 2014: Malaysian MH17 crash – Government-owned Russian banks, trade restrictions on defense industry, additional visa bans – Inability to borrow for more than 30 days
  • 9. Ruble Depreciation RUB/EUR RUB/USD • Depreciation by 23% (RUB/USD), 14% (RUB/EUR) • Most depreciation occurred after the third (sector) round of sanctions • Capital flight due to increased geopolitical uncertainty • Exports did not grow proportionately to ruble’s depreciation due to global economic slowdown • Ability to borrow abroad restricted by sanctions, limiting supply of foreign currency
  • 10. Inflation Acceleration • Inflation picked up significantly shortly after the first round of sanctions • Inflation rate kept roughly at or below the similar inflation level of 2008, the year of the global crisis • January--September 2014: 6.27% • January—September 2008: 10.57%; January-September 2013: 4.72%
  • 11. Capital Flight • Sharp increase in capital outflow in January 2014 was attributed to looming Western sanctions • Capital outflow is not much different relative to the average of previous years • Capital outflow does not increase dramatically as sanctions mount • Capital outflow is probably more the result of Russia’s structural problems rather than sanctions
  • 12. Russian Stock Market Response March 2014 Sanctions September 1995 March 2004 March 2014 Sanctions August 2008 3 November 2014 • RTSI grew after the first round of sanctions • Market as a whole appears to be ranging • 2008 crisis had much larger negative effect Source: RBK quote.rbc.ru
  • 13. Russia’s Food Imports Ban • Import ban on food imports from the EU, US, Canada, and Australia seems most important response so far (7 August, 2014) • In August alone – Moscow food prices up by 7% – St. Petersburg, 10% – Pork and chicken prices up by about 25% • Poland, Finland and Lithuania most affected by the Russian food ban
  • 14. Abolishing Bilateral Corridor on November 10, 2014 • The Ruble was allowed to move within bounds for a bilateral currency basket prior to the sanctions • Corridor bounds were adjusted tens of times since the start of 2014 • Discount rates increased three times since January 2014 • Interventions until 2015 only at the bounds • Floating exchange rate introduced in 2015 Source: Roskomstat
  • 15. What Measures Would Really Hurt the Russian Economy? • Restrictions on gas and oil exports • Exclusion from financial networks: VISA, Mastercard, SWIFT etc • Persuade OPEC to increase oil production
  • 16. Oil and Gas in the Russian Economy Budget crucially depends on the oil-gas revenues 30% of all Russian gas production is meant for exports Rising energy prices increased oil-gas revenue component of the Russian budget without any growth in the physical volumes Non-oil deficits persisting
  • 17. Oil Price Evolution If the trend continues: •Further deterioration of the government budget •Depreciation of the ruble •Further pressure on the National Welfare Fund to finance budget deficits  risk of social unrest (2018?)
  • 18. EU’s Dependence on Russian Energy Supplies EU depends on about 1/3 of its energy consumption on imports from Russia: •34% crude oil •26% solid fuels (mainly coal) •32% natural gas Germany, Italy, and Eastern European countries are the most vulnerable importers
  • 19. EU and Russia’s Dependence on Ukrainian Transit RU GE POL BR UKR TRK SW FI North Stream South Stream • 42% of Russian gas exports depends on Ukrainian transit • Ukraine’s inability to pay the contracted prices led to gas supply shortages in 2006 and 2009 • Ukraine’s current debt reached $5bn • To avoid dependence on Ukraine, Russia started constructing the North and South Stream pipe routes
  • 20. Gas Dependence and Sanctions • One way to really hurt the Russian economy is to limit her gas and oil exports • Cutting Russian gas and oil imports is: – Difficult since alternative suppliers are difficult to find – Politically impossible since the voters will not welcome electricity and heating shortages • Therefore, the most potent measure to ‘punish’ the Russian economy will not be taken in the foreseeable future
  • 21. Other Potent Sanctions • Ban VISA, Mastercard etc from doing business with Russia – Private companies are unwilling to lose their business – Byron Pollitt, VISA’s CFO, in April 2014: • "We are caught between the politics of the United States and the politics of Russia. We're clearly seeing a drop-off in cross-border volume, and sanctions are expected to have some impact on volume." • "We have 100 million cards there and it is not in anyone's best interest, inclusive of the Russians, to make those cards not available to their own citizens.” • Exclude Russia from financial networks e.g. SWIFT – Applied to Iran in 2012 – May be difficult to apply to Russia since that would hurt EU’s trade with Russia, including energy import deals
  • 22. SWIFT Statement SWIFT Statement: http://www.swift.com/about_swift/shownews? param_dcr=news.data/en/swift_com/2014/PR_swift_sanctions_statement.xml Brussels, 6 October 2014 - SWIFT and its stakeholders have received calls to disconnect institutions and entire countries from its network – most recently Israel and Russia. SWIFT is a neutral global cooperative company set up under Belgian law. It was established by and for its members to create a shared worldwide messaging service and a common language for international transactions. SWIFT provides services to over 10,500 financial institutions and corporations in over 200 jurisdictions around the world. SWIFT is a critical service provider to the financial industry and plays a pivotal role in supporting international commerce and trade. SWIFT services are designed to facilitate its customers’ compliance with sanctions and other regulations, however SWIFT will not make unilateral decisions to disconnect institutions from its network as a result of political pressure. SWIFT regrets the pressure, as well as the surrounding media speculation, both of which risk undermining the systemic character of the services that SWIFT provides its customers around the world. As a utility with a systemic global character, it has no authority to make sanctions decisions.
  • 23. Economy Near Potential Output • Growth rate of 7% prior to the crisis of 2008 – High carbohydrates prices – Spare capacity • Growth rate of ~1% during 2009-2013 – ~5% for similarly large emerging economies – ~3% for resource-rich countries • Currently – Weak credit growth – Slow rate of new business creation • Structural problems, not cyclical ones, mostly constrain the expansion of potential output
  • 24. Resource Rents and Red Tape • Resource-rich countries are prone to high resource rents – Short-termism – High extent of reliance on subsidies and transfers • Red tape restrictions – Far Eastern tuna / sanctions – Incumbent bureaucracy has few incentives to promote competition • Importance of performance-oriented public sector – Weaning bureaucracy off the resource exports revenues – Linking size of compensation to performance indicators
  • 25. Oil/Gas and Hard Budget Constraints • Carbohydrates-based growth ensures persistence of soft budget constraints – Janos Kornai (Econometrica, 1979) – Bailing out loss-making state enterprises during the Soviet time – Source of government transfers and subsidies to pay for social obligations e.g. pensions currently • Hard budget constraints – Shown to increase aggregate production efficiency – Are spurred by • US/EU sanctions • Dwindling oil prices – Are Russia’s chance to diversify its economy away from being a carbohydrate-oriented one
  • 26. Diversification • Tangible assets: not a major problem – a wide range of industries – decent GFCF rates – Improving infrastructure • Intangible assets: institutional framework – MAJOR problem – Contract law – Independent courts – Police corruption – Accountable public sector • Geographical – Decreasing extent of dependence on EU for hard currency flows – Reorientation to emerging Asian markets, specifically China • “Power of Siberia” • Transsiberian link to Korean railway networks – Payments in rubles/yuan