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By HaleStewart April 30, 2015 8:19 am
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Russia Continues To Deteriorate

     Russia has been suffering for the last year.  Their problems began after the West imposed sanctions in response to Putin’s invasion of Ukraine.  This cut Russian business off from much-needed financing.  The next economic shoe to drop came from low oil prices.  This was especially painful because oil accounts for 50% of Russia’s exports and government revenues.  These two events led to a sharp decline in the ruble; at its worst level over the last year it lost half its value versus the dollar.  In mid-December, to defend its currency, the Russian Central Bank raised interest rates to 17% in a surprise, midnight move.  While the bank has since lowered rates to 14%, they are still high enough to stifle growth.  And, no policy action has eliminated the country’s basic problem: the economy is caught in the grip of stagflation.

     Let’s start with top line GDP growth:

The last three monthly, Y/Y readings have shown an increasingly negative situation, with growth contracting 1.5%, 2.3% and then 3.4%.  The problems, however, to not end there:

Inflation has increased 8% last year to its current rate of 16%.  These last two charts show that Russia is in the middle of stagflation: low to contracting top-line growth combined with high inflation.  The central bank has no good policy options in this scenario.  To stave off inflation, they have to raise interest rates, which further's economic contraction.  However, this is actually the best option in the long-run because it gives the central bank anti-inflation credibility.  The Russian central bank has cleaerly chosen this path.

     The high rate of inflation and low rate of growth is negatively impacting wages:

The pace of wage increases has been slowing for the last three years.  However, it recently went negative.  This led to a huge drop in consumer confidence:

     Russian businesses are also losing confidence:

And low confidence is leading to a drop in industrial production:

     No matter how you look at the Russian economy, it’s in dire shape.  Adding to the concern is there is little reason to think it will get better.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer  

 

 

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