The Crisis with the Russian Economy

In the media, one sees each day the Russian Rouble depreciating in value against the international currencies.

The facts are clear.

On Friday 21st March 2014 €1 = 49 Roubles.
On Friday 19th Dec 2014 €1 = 79 Roubles.

The crash in value is incredible, and the issue is that Russian companies that had borrowed from banks in foreign currencies are now having to pay huge amounts to meet the same loan repayments. This simple examples shows:-

March 21st 2014, a Russian company borrows €100 from an European Bank. It then has €100 which it then converted into Roubles, and thus became 4900 Russian Roubles.

Now say on Monday 22nd Dec, the European Bank calls in the €100 loan. Now the Russian company needs 7900 Roubles to pay the debt back. The currency movement, has resulted in the loan ballooning from 4900 Roubles to 7900 Roubles.

The elephant in the room, is that the Russian economy has been based on Oil and Gas exports, and all that money has never been used to diversify the economy away from oil and gas. Thus it is evident to see that the Russian economy is totally dependent on these natural resource / energy exports as when one looks at the fundamentals, when was the last time anyone you know bought a Russian made mobile phone, a car, a washing machine, a television, an Android Tablet ?

The slump in oil prices has resulted in major financial stress for the Russian economy. Its exports are not bringing in the income, and the over dependence on this commodity is now resulting in this situation.

Leave a Reply

Your email address will not be published. Required fields are marked *