Impact of exogenous shocks on a natural resource driven economy

1. RUSSIAN FEDERATION
Impact of exogenous shocks on natural resource driven
economies
Analysis from 2008 to 2014

2. Russia (2014)
• Surface area: 17,098,242 km² (1st)
• Population: 143,8 millions (9th)
• GDP (US$): 1.861 trillions (6th)
• GDP per capita (US$): 12,925
• Gini: 0.42 (83rd)
• Currency: Russian Ruble (RUB)
10/07/2015 Russian Federation – Economic Environment 2

3. History
• Perestroika (1988-91)
• Gorbachev first modest steps to reform (allowing private-sector
activity)
• “Katastroika” (1991-1998)
• Yeltsin’s radical reforms to introduce a market economy
• 90% of price controls lifted
• 70% of economy transferred to private ownership
• Vast wealth transfer to oligarchs
• 30% of population below poverty line
• Real wage decrease by 38%
• Life expectancy halved while crime rates doubled
Russian Federation – Economic Environment 310/07/2015

4. History II
• Since Putin’s access to power in 1999 Russia’s GDP has
doubled
• Population below poverty line decreased from 35% to
11% (2003-2013)
• Living standards of average Russian doubled
Russian Federation – Economic Environment 410/07/2015

5. Economy: Natural resources
• Natural resources contribute 19% to GDP
• Value of sub-soil wealth: $75 trillion (Largest on earth)
• Federal budget revenues from energy sector: 50%
Russian Federation – Economic Environment 510/07/2015
68%
11%
17%
4%
Russian exports 2013 in %
Oil & Gas
Metals & precious
metals
Manufactured goods
Other

6. Economy: Geography
Russian Federation – Economic Environment 610/07/2015

7. Economy: Structural flaws
• State ownership made comeback under Putin (50% of
GDP in 2012)
• SME’s account for only 20% of GDP and employment
• Global rankings:
• Index of Economic Freedom 2015: 143rd of 178 (OECD)
• Doing Business 2013: 62nd of 185 (WB)
• Corruption Perception Index 2014: 136 of 175 (Transparency INT.)
• Cost of corruption estimated at 50% of GDP (!)
Russian Federation – Economic Environment 710/07/2015

8. Economy: Productivity
Russian Federation – Economic Environment 810/07/2015

9. Economy: Inequality
Russian Federation – Economic Environment 910/07/2015
• Growing inequality
• Top 10% control 84% of total household wealth (Credit Suisse)
• 110 Russians control 35% of total household wealth (Credit Suisse)

10. Economy: Lack of innovation
• Russia’s scientific publications are 4% of the US’
• High technology exports 8,3% compared to EU’s 15,3%
Russian Federation – Economic Environment 1010/07/2015
R&D spending as % of GDP in 2011 International patents in 2012

11. Shock 1: Ukraine crisis
• Nov. 2013: Yanukovych suspended implementation of an
association agreement with the European Union
• 21 Feb. 2014: Month of protests led to Yanukovych
fleeing the country and Russophone regions in East and
South to revolt
• 26 Feb 2014: “Pro-russian gunmen” take over Crimea
• Mar. 2014: War in Donbass region
Russian Federation – Economic Environment 1110/07/2015

12. Shock 1: Ukraine crisis II
• International community decided an array of sanctions to
hit the Russian economy:
• Asset freezing against high-profile businessmen & government
officials
• Sanctions against Russia’s financial sector
• Sanctions against Russia’s defense & aerospace sectors
• Bans of exports of oil industry technology
Russian Federation – Economic Environment 1210/07/2015

13. Shock 2: Drop in oil price
• Slight drop in demand due
to weak economies (EU,
China, etc.)
• OPEC not reducing output
• Output increase by Russia
despite sanctions
• Output increase in US due to
shale oil expansion
Russian Federation – Economic Environment 1310/07/2015

14. Inflation
• Inflation rise is continued after the shocks
• Why?
Russian Federation – Economic Environment 1410/07/2015

15. Exchange rate plummets
• Ruble loses 46% of its
value vs. US Dollar
• Correlation with dramatic
decrease in oil price
• Loss of confidence in the
ruble due to sanctions
• Massive capital outflows
• Dollarization of savings
Increase in prices of imports… Countermeasures?
Russian Federation – Economic Environment 1510/07/2015

16. Countermeasures
• Restrictive monetary policy
• Quick increase of interest
rate
•Emergency lending
facilities for banks
• Only partially effective
because causes were non-
monetary
Russian Federation – Economic Environment 1610/07/2015

17. Fiscal countermeasures
• Recapitalization of unstable banking system (RUB 1 trillion or 1,4%
of GDP)
• Ban on imports of food from western countries (food inflation at
20%)
• Infrastructure projects for RUB 900 billion or 1,2% of GDP
Russian Federation – Economic Environment 1710/07/2015

18. Real GDP growth
• Real GDP growth decreased from 1,3% in 2013 to 0,6% in 2014
• Shocks do not seem to have affected GDP too much
• Why?
Russian Federation – Economic Environment 1810/07/2015

19. Trade
• Government banned food imports from western countries
• Decrease in imports was larger than decrease in exports
Russian Federation – Economic Environment 1910/07/2015
-40
-30
-20
-10
0
10
20
30
2008 2009 2010 2011 2012 2013 2014
Growth in Imports/Exports % of GDP
Imports Exports

20. Current Account Balance
• Slight improvement in
CA balance
• Goods more than make
up for outflows in every
other account type
• Investments income
outflow dropped because
of sanctions
• Suitable long-term
situation?
Russian Federation – Economic Environment 2010/07/2015

21. Unemployment
• Unemployment actually dropped further
• Structural feature of Russia’s labour market: quick adjustment of
wages
• Consumption suffered due to loss of purchase power
0
1
2
3
4
5
6
7
8
9
2008 2009 2010 2011 2012 2013 2014
AVG BIC
AVG G7
RUSSIA
Russian Federation – Economic Environment 2110/07/2015

22. Government budget
• 50% of budget depending on energy
revenues
• Government budget does not give the full
picture of the damage done to the state
• Sovereign wealth fund dropped by 0,1% GDP
5
-6
-3
2
0
-1 -1
-8
-6
-4
-2
0
2
4
6
08 09 10 11 12 13 14
Government Surplus/deficit in % of GDP
Russian Federation – Economic Environment 2210/07/2015

23. Government debt
• Increase in 2014
• Low levels of debt
• Debt does not seem to pose a long term problem
56 58 56 55 56 56 57
89
101
107 111 115 117 118
8 11 11 12 13 14 18
0
20
40
60
80
100
120
140
2008 2009 2010 2011 2012 2013 2014
Debt-to-GDP ratio in %
AVG BIC
AVG G7
RUSSIA
Russian Federation – Economic Environment 2310/07/2015

24. Investment
• Sharp decline in 2014 of FDI (59% from 2013 to 2014)
• Crucial for the natural resources since most of the technology comes
from abroad
• Effect of sanctions
0%
1%
2%
3%
4%
5%
2008 2009 2010 2011 2012 2013 2014
FDI inflows in % of GDP
Russian Federation – Economic Environment 2410/07/2015

25. Long-term effects?
• Natural resource prices are fixed for longer periods of time
• Effect of import bans and ruble depreciation will become more
severe:
• Continuous rise in inflation
• Loss of purchase power
• Drop in investor confidence (crucial for investment in natural
resources)
• No access to external finance due to sanctions
• Shaking banking sector
• Political tensions due to loss in welfare and lifestyle?
Russian Federation – Economic Environment 2510/07/2015

26. Conclusion
Russian Federation – Economic Environment 2610/07/2015