Russia Is Falling Into A Recession

PutinREUTERS/China DailyRussia’s President Vladimir Putin holds a shovel as he takes part in a tree planting during the Asia Pacific Economic Cooperation (APEC) Summit in Beijing, November 11, 2014.

Russia’s Economy Ministry has downgraded its growth forecast for the country in 2015 from 1.2% growth to a 0.8% decline. In other words, the country is falling into a recession.

The net amount of foreign capital expected to flow out of the country in 2014 has been revised sharply upwards to $US125 billion (up from $US100 billion), while the projection of net outflows for next year has also been increased from $US50 billion to $US90 billion.

Independent Russian news agency Interfax reports Deputy Economic Development Minister Alexei Vedev as saying that the downgrade reflects the decrease in the forecast average price of Urals crude next year from $US100 a barrel to $US80 a barrel.

Russia relies on the oil and gas sector for 10% of its GDP and around 50% of its government budget. However, since June global oil prices have been in free fall with Brent falling from a June high of around $US115 a barrel to just over $US72 a barrel on Tuesday. The majority of forecasters now suggest that it will remain under $US100 a barrel through 2016.

These concerns have helped drive capital out of the country and force down the value of the Russian rouble against other major currencies. Indeed the rouble has closely tracked the collapsing oil price over the past six months:

BloombergRouble (orange) versus Brent oil price (green).

Despite a modest rally in early trading on Tuesday, as further falls in oil prices compounded news of the downgrade sending the currency tumbling again to over 52 roubles to the dollar at the time of writing.

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