IEEJ：December 2014

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Special Bulletin

A Japanese Perspective on the International Energy Landscape (199)

December 18, 2014

Ruble Plunge and Russian Economic Turmoil
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanThe rapid oil price drops have greatly shaken the Russian economy. On December 16, theRussian ruble plunged to this year’s new low of 78 rubles to the dollar, losing more than 60% fromthe beginning of the year. On the day, the Russian central bank raised its policy interest rate from
10.5% to as high as 17% to defend the ruble that was accelerating its fall over the past month. But
the rate hike has failed to stop the ruble’s plunge. Russia’s RTS stock market also declined
substantially, expanding overseas capital outflow. “Russia selling” is accelerating.

It may be needless to say that the remarkable oil price declines have been behind the rubleplunge. The recent oil price falls have come as a great shock to the Russian economy that has
suffered Western countries’ economic sanctions triggered by the Ukraine problem and a slowdown in
the European economy as Russia’s major trading partner. The oil price declines have a great impact
on the Russian economy that depends heavily on the oil/gas sector, with oil/gas exports accounting
for some 70% of its total exports. At the crude oil price of $60 per barrel, Russian gross domestic
product in 2015 would contract 4.5% (as estimated by the Russian central bank). Under suchsituation, the currency and stock market plunges symbolize Russian economic turmoil.

As crude oil prices are expected to test lower ground and remain weak for the immediatefuture, the situation will continue to be severe for Russia. The ruble will remain under downward
pressure. If the Russian central bank continues buying rubles to support the currency, Russia’sforeign exchange reserves will decline. The policy interest rate hike may further dampen the Russianeconomy. As Western economic sanctions are being toughened to make it even more difficult for
Russian companies to raise funds in Western countries, concerns and risks are lingering about
Russia’s external debt repayment. The coming year 2015 will see difficult and severe economicconditions for Russia.

The grave economic problem for Russia could have a great negative impact on the world
economy. As “Russia selling” continues, Russia’s economic turmoil or recession and its credit fears
are expected to spill over to the world. The Russian economic slowdown will naturally exert direct
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negative effects on companies and regions that have close economic relations with Russia.

If external debt repayment concerns and default risks arise amid the economic deceleration,and currency and stock market weakness, credit fears may not be limited to Russia but spill over to
Russia’s Western lenders and the entire world. As the 1997 Asian currency crisis, the 1998 Russian
financial crisis and the 2008 Lehman Shock have indicated how grave credit fears and financial risks
can affect the world economy, financial market players have grown nervous about the Russian
economy.

Economic risks triggered by the oil price falls have first emerged in Russia and are spillingover to other resource-rich emerging countries (Brazil, Indonesia, Turkey, etc.) conceived as plagued
with heavy dependence on resources and other challenges similar to those for Russia. If financial andcommodity market risks grow, risk-avoiding moves may accelerate to further lower or destabilize
these markets. In this sense, the ongoing Russian economic turmoil may have to be recognized as agrave destabilizer for the world economy.

Russian economic problems are important not only for the world economy but also for
Russian domestic and international politics. Russia’s tough external stance after the emergence of theUkraine crisis has encouraged Western countries to toughen economic sanctions on Russia, making
the environment severer for Russia. Within Russia, however, approval ratings for President Vladimir
Putin and his administration have exceeding 80%, indicating that President Putin has taken
advantage of the crisis for gaining high domestic popularity. If the economy decelerates growth or
suffers a substantial contraction to aggravate financial and credit fears, with the ruble’s decline andprice hikes affecting civil life seriously, however, the domestic politics and the popularity of thegovernment will be affected. Economic destabilization could politically shake Russia. In this sense,
we must closely watch how the Russian government would overcome the current economicdifficulties.

As noted in my previous report titled “A Japanese Perspective on the International Energy
Landscape: Positive and Negative Impacts of Rapid Oil Price Drops,” the crude oil price falls have a
net positive impact on the world economy. If the falls are too rapid and substantial, however,negative impacts may grow greater and diffuse wider to outdo positive impacts. What’s happening inregard to Russia now represents a situation where huge negative impacts of oil price falls are shaking
the world economy.

Regarding the international oil market, the Russian economic turmoil could either a) leadto an oil demand decline by affecting the world economy; or b) prompt oil producing countries to cut
oil supply in response to an unexpectedly serious development. In this sense, the problem is a major
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factor influencing the future course of the oil market. In 2015, we will have to closely watch Russian
developments in anticipating the international energy market.

Contact: report@tky.ieej.or.jp
The back issues are available at the following URL
http://eneken.ieej.or.jp/en/special_bulletin.html

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