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Russia’s Economic Development Ministry reports that the country’s economy shrank for the first time in five years in November, measuring 0.5 percent lower in November than it did in the same month the previous year because of dramatic drops in both investment and manufacturing.
“A sharp slowdown in manufacturing had the main negative effect on GDP dynamics in November,” the Economic Development Ministry said in the announcement on its website. It said there also were serious drops in wholesale trade, agriculture and construction.
This was more bad news for the Russian currency, the ruble, which continued to lose value because of the steep plunge in the price of oil, Russia’s most abundant resource, and Western sanctions imposed because of Moscow’s suspected role in a bloody uprising in neighboring Ukraine. Hours after the report was issued, the ruble was down an additional 5 percent, trading at 56 per US dollar in Moscow.
The depreciation of the ruble comes despite recent efforts by Russia’s Central Bank to stabilize its currency by raising its most important interest rate to 17 percent and offering both dollars and euros to Russian banks to lend to export businesses that need such currencies to support their activities.
Yet the Central Bank also has been selling foreign currencies to support the ruble, leaving its current reserve of such monies below $400 billion for the first time since August 2009. And the sanctions, imposed by the European Union and the United States, have denied Russian banks access to Western capital markets.
Besides sanctions, Russia also is extremely vulnerable to the sharp drop in oil prices, which have fallen nearly by half since June, according to Dmitry Polevoy, the chief economist for Russia and CIS ING Bank in Moscow.
“With the current oil price we expect things to get worse. There is no cause for optimism,” Polevoy told Reuters. “This is linked to sanctions first of all, oil and the panic we saw on the market in December. The damage to the banking system and consumer sentiment will take a long time to repair."
It doesn’t look as if the trouble will end any time soon. In fact, many believe that in 2015 Russia will face its first recession since 2009. A recession often is defined as two consecutive yearly quarters of economic contraction. If the price of oil stays at around $60 per barrel, then Russia’s economy could contract by about 4 percent in the coming year, according to Russian Finance Minister Anton Siluanov.
In an effort to counter the downward trend, Russian Prime Minister Dmitry Medvedev said he had signed a decree that would disburse 1 trillion rubles – $19.6 billion – to Russian banks to ensure their solvency. Deputy Prime Minister Igor Shuvalov said the names of the banks and the amount each is due to receive will be decided by mid-January.
Medved also warned that Russia faces the risk of a “deep recession.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com