In one of his semi-annual choreographed question-and–answer sessions with the Russian people last week, President Vladimir Putin exuded confidence about the future of the Russian economy. The dramatic drop in oil prices over the past year and the plunging value of the ruble combined with international sanctions imposed after Russia’s invasion of Ukraine’s Crimean peninsula last year might look like a disaster, he said, but they will ultimately drive Russia to new economic heights.
“We must use the current situation to reach new levels of development,” Putin said during a nationally televised call-in show. “If we preserve a stable situation in domestic politics, preserve the current consolidation of society, we shouldn't fear any threats.”
The news in the past week seemed to justify the optimism -- for a while, at least. Industrial output numbers jumped up in March, and inflation, while still extremely high, at slowed on a week-over-week basis.
Also promising was the continued growth in the Russian ruble’s value against global benchmark currencies. The ruble, though still dramatically weaker than it was just a year ago, has rebounded significantly from historic lows late last year.
All that said, the state of the Russian economy might best be compared to a patient who has been removed from the intensive care unit, but remains in critical condition, as more recent news revealed this week demonstrated.
Data released by the state statistics agency Rosstat found that in the first two months of 2015, the country’s volume of foreign trade fell by 30.1 percent compared to the previous year, a total of $83.8 billion.
On Monday, the value of the ruble plunged again after the Central Bank of Russia increased the price it charges for foreign exchange repurchase contracts. The ruble’s declining value has been a major issue for the Russian economy because it has vastly decreased the purchasing power of ordinary Russians’ income. However, the ruble’s recent recovery has proven problematic for the Kremlin.
Much of the money owed to Russia’s oil and gas industry is denominated in U.S. dollars, meaning that as the ruble grows stronger, every dollar’s worth of oil Russian companies sell is worth less in the domestic economy.
One of the biggest issues facing the Russian economy is that U.S.-led financial sanctions have broadly cut off Russian firms from the international capital markets. As of Monday, there seemed to be some confusion among officials in Moscow about the significance of the disconnect between the Russian economy and the global market.
According to Deputy Finance Minister Maksim Oreshkin, things are looking rosy. “Russian companies are gradually coming back to international debt markets, some of them report on consortium loans, Eurobonds are being considered and discussed, all this means a direct decrease in capital outflow if such borrowings take place,” he told the state-run TASS news agency.
That wasn’t the message coming from Deputy Prime Minister Arkady Dvorkovich when he spoke to CNBC at the World Economic Forum in Jakarta -- also on Monday.
"The shortness of financing for new investments is where the Russian economy is being hit in the most important way," Dvorkovich said.
Top Reads from The Fiscal Times: