A Cornered Bear? Increasing Russian Economic Woes

Faster than you can say ‘Yeb vas’ the Russian ruble has gone from being in an exceptionally negative position to the verge of total collapse. A combination of Western sanctions and plummeting oil prices has inflation skyrocketing. The Russian government has thrown in the towel and all but admitted that the country is heading into a recession. The government expects the economy to shrink by 0.8% in 2015 and that estimate is not even a worst-case scenario. If oil prices keep dropping, the contraction could be as great as 5%.

Here’s the problem in a nutshell: Falling oil income is taking a large chunk of revenue away from the Russian government. Federal departments have been ordered to trim their budgets by 5%. So far, the massive military modernization the Russian military is undergoing hasn’t been affected. But if the current trend continues or even worsens, that could change. The pinch is going to be felt by the average Russian citizen too. Consumer price inflation is going to reach 10-11% by the end of the year. The reasons for this are the falling ruble and Russia’s ban on food products from the West. The ban was put in place as retaliation for Western sanctions imposed on Russia over its actions in the Ukraine.

How Russia responds to the economic downturn could have ramifications far beyond its borders and financial markets. It does not bode well for Vladimir Putin’s political future. At a time when world opinion is firmly against him, the last thing he needs is to lose favor with the Russian people. However, if we’ve learned anything about Putin, we know that he will not stay complacent while the economy sinks. There are plenty of culprits Putin can lay the blame on justly or not. The United States, the European Union and Ukraine top the list. Do not expect to see Moscow withdraw its support for the separatists in the Ukraine or hand Crimea back to Kiev. If the situation continues to worsen, expect Putin to begin playing the blame game and riling the Russian people up into an anti-West fervor.

What happens from there is anyone’s guess. Needless to say, the end result may not be good.