How Is Russia’s Economy Holding Up

There is a lot of news chatter about the impending doom of the Russian Economy. The Ruble has fallen 45% against the Dollar during the last 6 months. Crude oil & gas, Russia’s main exports, have fallen in half from 6 months ago. Russia depends on oil & gas revenue to balance its domestic budget, so their budgeting process is in turmoil. American economic sanctions are really starting to bite.

Maybe! I believe that many analysts are grossly exaggerating any difficulty that Russia may be having. Let’s look at a few items.

Sanctions? Russia already wants to stop using the Dollar in its world trade. The sanctions arguably were put in place more because Russia tried to unload US Treasuries than because of Russia’s moves in Ukraine, which it once owned. That Russia and its central bank no longer are buying more Dollars – they already have more than desired – is why the Ruble has fallen.

But, the Ruble HAS fallen! Yes, by about the same amount as oil has fallen in Dollars. The Ruble price of oil has changed quite little. Oil & gas revenues, in Rubles are almost what they were, so the domestic budget is having scant difficulty. Russia has maintained output because it has more buyers than it needs. It did Europe a favor by agreeing to continue supplying oil & gas – in Gold or in Euros immediately converted into Gold.

A falling Ruble also means that everything it imports goes up in price, so yes, imported goods will cost Russian consumers more. The Ruble has fallen a little over 1/3 against the currency of its major trading partner, Europe’s Euro. But with imports of around 1/6 of GDP, that’s about a 5.5% price increase for the overall Economy – a hit, hardly hyper-inflation.

But, those higher import prices – 1/3 foreign exchange drop in the Ruble – translates into changing consumer preferences. Imports will go way down, while demand for domestically produced goods will go up. That’s more jobs for Russians to supply the Russian market.

So far, the Balance of Trade is not a problem. During 2012, Russia imported $358 Billion worth of goods and exported $543 Billion. The lower prices for oil & gas certainly lowered exports (in Dollars), but the surplus will hold Russia over as imports shrink into “Made in Russia.”

I expect that the Russian Economy is in much better shape than many currently give it credit for. If oil falls more, so will the Ruble. And, once everyone realizes that the Russian sky hasn’t fallen, whatever investment money which has fled the turmoil will return.