Russia:Major challenges and important decisions in 2015


The year of 2014, which was rich in events and has set new challenges for the country, is drawing to a close. Russia has entered an unfavorable stage of the economic cycle, which will be influenced in the medium term by economic sanctions, falling of oil prices, devaluation and acceleration of inflation. 

Negative processes in the economy have resulted in a perceptible slowdown in the consumption growth of the population, proving by the reduction in retail trade turnover from 3.6% in I quarter to 1.8% in the II quarter this year. A raise of key rate by Central Bank to 9.5% in the future can significantly chill the activity in the domestic borrowing market. Tense geopolitical situation makes the leading investors nervous. Currently serious infrastructure solutions are required from the state, which is now more relevant than ever.

All this affects the key macroeconomic indicators - GDP growth, which is slowing down for three consecutive quarters and absolutely does not correspond to the potential capabilities and needs of the country for the development of existing and new industries, creating jobs in the service sector. 

Figure 1. Quarterly GDP growth rate of the corresponding period of the previous year,%

Figure 2. Dynamics of prices for Brent oil and the Russian ruble against the US dollar

Against the background of the rapid devaluation of the national currency, the historic decision of the Bank of Russia to cancel the currency basket corridor and regular foreign exchange intervention from November 10, 2014 has gone almost unnoticed. Floating exchange rate determined by market forces - is an important step towards full convertibility of the ruble, means of international payments and reserves.

The falling ruble is under enormous pressure of market participants due to lower of oil prices.

On the one hand, a weak ruble compensates losses of the budget from foregone export revenues; on the other hand – companies, attracting loans in the foreign market, will feel the sting of extra costs for loans service increased in price. Large list of products purchased abroad also increased in price. All this will lead to the acceleration of inflation and the deterioration of the growth dynamics of the population’s real wages and pensions.

However, despite the current geopolitical turbulence, a healthy optimism should be kept. The upcoming 2015 will be a year of challenges and difficult decisions that finally define new growth points and ways to diversify the economy.