The Russian economy, hit by plummeting oil prices, sliding ruble and Western sanctions, is being pushed towards recession. The economy never fully emerged from the global economic crisis. The ruble has now lost almost 100pc of its value against the main world currencies and over 50pc against the dollar in 2014.

Russia is one of the world’s largest oil producers, with oil and gas accounting for 70pc of export incomes. It loses about $2bn in revenues for every dollar fall in the oil price. The World Bank has predicted that its economy would shrink by at least 0.7pc in 2015 if oil prices do not recover. The government has also cut its growth forecast for 2015 and expects the economy to enter recession in the first quarter of 2015. According to the Russian Ministry of Economic Development, the country’s GDP will decline by 0.8pc in 2015.

According to its former finance minister, Alexey Kudrin, Russia is entering a full-blown economic crisis, with the country’s GDP likely to fall by 2-4pc in 2015. Imports may plunge by 40pc amid the ruble’s slump and the inflation may hit 12-15pc. The negative impact of sanctions on the economy is no weaker than that of the oil price slump and of the weakening of the ruble. The sanctions have greatly hurt the investment conditions on the domestic market as the share of foreign borrowings has risen. This situation is likely to worsen investment conditions. A series of defaults in Russia are expected in 2015.

With the ruble’s value more than halved against the dollar, the central bank of Russia has warned that the country’s GDP could contract by 4.5-4.7pc should oil prices remain low. The steep fall in the ruble’s value has pushed the official inflation rate to 11.4pc by end-2014. The central bank predicts a 10pc inflation rate in the first quarter of 2015. In 2013, the annual inflation level was 6.5pc. The 2014 inflation figure is the highest since Russia’s financial crisis in 2008.

Due to a fall in world oil prices below the projected level, Citigroup Chief Economist for Russia Ivan Chakarov has lowered the country’s economic growth forecast for 2015 from plus 1pc to negative 3pc. The new forecast is based on average Brent oil price of $63/barrel compared with the previous projection of $80/barrel. The economy will, however, perform better in 2015 compared with the crisis year of 2009 but will not grow at the previous pace any longer.

Western sanctions have tightened access to credit, and rising borrowing costs will impede growth still further. As Russia’s economy heads for recession, the head of the Russian banking association, Anatoly Aksakov, has urged the central bank to sharply cut interest rates to prevent a wave of corporate bankruptcies and collapsing demand for loans. The bank hiked interest rates to 17pc last in December to restrain the collapse of ruble but the currency has been recouping its losses since then. The move has also sent the cost of borrowing skyrocketing. One year ago, the central bank’s interest rate was 5.5pc. The rate hikes have already caused some companies to go bankrupt.

Australia

AUSTRALIA is moving toward a slower economic growth. Weak commodity prices and stronger dollar are continuing to weigh on the Australian dollar in 2015. The economy will grow by 1.5pc, the slowest rate since the global financial crisis in 2009, according to the Morgan Stanley economic outlook for 2015. Federal Treasury is tipping 2.5pc growth in 2015. A Bloomberg survey of 35 economists have forecast an average GDP growth of 2.54pc for this year. Australia’s unemployment rate — currently 6.3pc — will rise further to 6.5pc by mid-2015.

The Australian dollar will dip to 76 US cents, according to the Morgan Stanley’s current forecast. Some analysts predict that the local currency could drop to around 73 US cents by mid-year. The Australian dollar is currently trading at just above 80 US cents, plummeting to its lowest level in five-and-a-half years. The broader economy remains weak while Australian incomes will continue to suffer the effects of the sharp fall in the terms-of-trade. Low interest rates will continue to support property prices but slow income growth will offset much of those benefits during 2015.

The country has been struggling consistently with the negative impact of a slowdown in mining development, declining commodity prices, and renewed fiscal restrictions. According to Goldman Sachs, Australia’s GDP in 2015 should fall to 2pc, well below the previous estimate of a 2.9pc rise. The slump in mining-based investments will continue to drag the economy down. The big issue is the sharp fall in prices for iron ore and other resources. The sharp decline in resource prices has had a major effect on Australia’s export revenue and its government’s tax revenue. Iron ore is Australia’s largest export, contributing 25.5pc of the country’s exports.

The slump in commodity prices will lead to a significant cut in capital spending in resource development which has been a major driving force behind the Australian economy. Government forecasts estimate the slump in prices will reduce the tax revenue by $18.9bn over the next four years. The Mid-Year Economic and Fiscal Outlook 2014-15 shows the budget deficit is expected to widen to AUD40.4bn or 2.5pc of GDP by June 2015, up from AUD29.8bn or 1.8pc of GDP forecast earlier. This is a significant deterioration in the deficit outlook since the 2014-15 budget announcement, indicating a large budget deficit for several years.

The mid-year outlook report keeps the June 2015 year GDP growth forecast steady at 2.5pc. The Australian Treasury projects that 2015 will be a better year for the Australian economy than 2014 as lower energy prices, a lower Australian dollar and interest rates at historic lows continue to facilitate stronger economic growth. Massive investment in new and upgraded roads, and in transport and business infrastructure, will strengthen the productive capacity of the Australian economy. Most economists think growth will improve slowly to 2.5-3pc.

Published in Dawn, Economic & Business, January 19th , 2015

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