Amid continued economic deterioration, the Russian government took steps to reassure the public yesterday that its leaders are on the job. Russians have seen the purchasing power of their savings cut in half due to a plunge in the value of the ruble, brought about by a devastating decline in oil prices and a raft of economic sanctions levied by the international community in response to President Vladimir Putin’s decision to invade parts of neighboring Crimea.
On Monday, Russian Prime Minister Dmitry Medvedev admitted that the economy is facing a crisis, but said the Kremlin was focused on the problem. Russian leaders will apparently respond by holding meetings. Lots of them.
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“The economic situation is quite problematic to say the least,” Medvedev said Monday, according to a number of media reports. “Therefore, all of the members of the government must hold key meetings in the areas that they coordinate, as we have already agreed.”
“This should be done regularly,” he said.
However, given the challenges facing Russia, the usefulness of bureaucrats gathering in conference rooms is debatable. On Monday, the market prices of both crude oil and natural gas, far and away Russia’s most important exports, continued their precipitous drop.
Benchmark crude oil prices are now lower than they have been in years, at $45.66 per barrel, compared to more than $100 a year ago. Natural gas prices have fallen by nearly half since the summer.
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The result is that the Russian economy – and the Kremlin’s treasury – continues to be in serious trouble. International lenders have been reluctant to provide liquidity to the Russian government. The Russian central bank has cancelled several debt auctions in the past six months, and in the rare case in which it allowed one to continue, sold only a fraction of the debt it was offered at a price higher than most U.S. firms with “junk” level debt ratings have to pay.
The Russian government still has substantial foreign currency reserves left over from the days when oil was expensive but has been gradually spending them down in an unsuccessful effort to prop up the value of the ruble.
The Fitch ratings agency last week became the latest to pile on the Kremlin, reducing its rating of Russia’s sovereign debt to one level above its top-level junk bond rank. Some might argue that the market was well ahead of the rating agency, but the announcement lent a degree of authority to something many market participants were already feeling.
“The economic outlook has deteriorated significantly since mid-2014 following sharp falls in the oil price and the ruble, coupled with a steep rise in interest rates,” the Fitch announcement read. “Western sanctions first imposed in March 2014 continue to weigh on the economy by blocking Russian banks' and corporates' access to external capital markets.”
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It continued, “Having grown by just 0.6 percent in 2014, Fitch now expects the economy to contract by 4 percent in 2015, compared with our previous forecast of minus 1.5 percent, as steep falls in consumption and investment are only partially offset by an improvement in net exports, driven by a sharp drop in imports. Growth may not return until 2017.”
Adding an insult to the injury of a near-junk rating, the Fitch announcement noted that the agency’s assessment of the Russian economy comes with a “negative outlook” – meaning that there is a substantial likelihood of further downgrades in the future.
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