HANOI UNIVERSITY

FACULTY OF MANAGEMENT AND TOURISM

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RUSSIA’S

FINANCIAL CRISIS

Teacher: Dao Mai Huong

Nguyen Thi Van Anh

Students: Tong Phuong Linh

Phan Kim Ngan

Nguyen Minh Quan

Pham Ngoc Khanh Linh

Nguyen Dinh Quang Minh

Class: Tut 4

Course: Financial Monetary Theory

Hanoi, 17th November 2020

 ABSTRACT

Economic crisis is considered as the failure in the economy performance. It

can be caused by multiple reasons such as problems in liquidity, a fall of
assets, inflation, pandemics and so forth. In order for a nation’s economy to
recover, various solutions and policies needed using and took years to fully
escape from the current situation. However, in Russia’s economy case, that
financial crisis was led from the misleading decision of the government
caused severe decline not only in its foreign financial field but also in the
domestics. The second half of 2014 witnessed a serious crisis of the Russian
economy, which in particular, the most obvious manifestation is a continuous
decrease in the value of copper Ruble's local currency. The causes that led to
this Russian financial crisis originated in the country itself. Russia, an
economy based on energy exploitation and export, is very "sensitive" in the
fluctuations in world oil prices and from outside Russia with a sharp decline
of Global crude oil prices, Western sanctions against Russia are pulsed
between Russia and the West over Ukraine and Crimea. This essay will
analyze how the Russia crisis development, its effects on the Russian
economic and some policies which helped Russia to recover from the crisis

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 Table of Contents
ABSTRACT.....................................................................................................................................i
INTRODUCTION...........................................................................................................................1
ANALYSIS......................................................................................................................................1
1. Reasons of Russia’s Financial Crisis....................................................................................1
2. The cause of the implemented penalty on Russia’s Economy.............................................1
a) Foreign Market..................................................................................................................1
b) Domestic Market...............................................................................................................3
3. Russia’s Economy Policy to recover the Economy..............................................................5
a) Western sanctions against Russia are pulsed between Russia and the West over
Ukraine and Crimea..............................................................................................................5
b) Russia’s macroeconomics measures to solve the crisis.................................................5
c) Some monetary policies that been used to recover the economy..................................5
Conclusion.......................................................................................................................................7
REFERENCE..................................................................................................................................8
APPENDIX (A)...............................................................................................................................9
APPENDIX (B).............................................................................................................................10
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INTRODUCTION

Russia is recognized as the eighth largest economy in the world where 30% Russia GDP & 60%
of exports depend on crude oil production. However, a failure in political decisions implemented
in 2014 caused this nation to fall in a deep economic crisis taking almost a decade to recover.
The reasons, results and solutions of this crisis will be provided in this essay.

ANALYSIS
1. Reasons of Russia’s Financial Crisis
The reasons, results and solutions to this financial crisis will be discussed in the following essay.
In 2014, President Vladimir Putin had put the economy of this nation into financial crisis
according to Economic sanctions (3 round punishment) implemented by the contemporary
president, Mr. Barack Obama.
On March 18th 2014, President Putin decided to annex Crimea, a territory of Ukraine, with the
political view and unpublic military intervention. This act of Russia caused sanctions from the
U.S and European countries on the Economy field on 19/12/2014, made the oil prices and the
value of Ruble to fall. To be exact, President Obama firstly has been authorized to sign to impose
financial sanctions on whoever is responsible for the Crimea annexation. Secondly he planned to
expand it. Finally, the US cooperated with Europe against Russia. This act of the US has made
Russia witness the results from both the international and domestic market.

2. The cause of the implemented penalty on Russia’s Economy

a) Foreign Market
First of all is the results of the sanctions to Russia’s international market. In February 2014, due
to a boom in American shale oil prices, Russia’s price on the same category changed: for every
$1 decline, Russian loses billions of dollars. It was not until the period from June 2014 to
December 16th (as known as the Black Tuesday) when the Russia oil price plummeted fifty
percent from $100/barrel to $60/barrel despite the price of $100/barrel to balance the budget. In
the next year, from August 2015, the oil charge had risen slightly from $37/barrel to $45/barrel.
Secondly, the Ruble exchange rate went down also. To be specific, in January 2014, the value of
the Ruble lost 7% against the US dollar & 5% compared to Euro despite the Russia Central
Bank’s defence, recorded all-time low. In March of 2014, Investment & Capital fled $63 billion
in 1st quarter, $125 billion at the end of 2014. On July 17th 2014, new sanctions were made that
affected the $650 external debt of Russia & corporations must be returned instead of rolled over.
At the beginning of December to 16th at the same month, on the RTS index market, the Ruble’s
value had large drop of 30% based on the chart and the table below:

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Event  Date RUB/USD

Euromaidan 21/11/2013 32.9975

Annexation of Crimea 18/3/2014 36.2477

Minsk Protocol 5/9/2014 37.0028

Donbas general elections 2/11/2014 43.0072

Central Bank intervention 16/12/2014 68.4910

As we can see from the table, the longer it took the larger the rate of RUB to USD. At the end of
2013, along with the Euromaidan event, the exchange rate was only 33 Rub per $1 US dollar.
When the annexation started, the rate had increased a little to 34 Rub per $1USD. However, after
the intervention of Russia's Central Bank, the situation did not reduce it’s tension but rose
instead, to double the rate specifically. 
Not to mention the Central Bank of Russia’s intervention, on 15 December, from the sixth
highest foreign currency reserves in the world worth $400 billion, despite the attempt to
strengthen the declining ruble by spending $2 billion and raise the interest rate by 7.5%, the
Ruble decreased to 79 Ruble to $1USD. On December 22nd, Trust Bank was lent $530 million
by the Central Bank, making it the first bank to accept a government bailout during the crisis. In
2015, there were numerous times that the Central Bank reduced the interest rate. In January, the
interest rate fell from 17% to 15%, then it went down to 14% and 12.5% in March and April
respectively. It ended up with the interest rate of 11% at the end of July. Along with the fall of
interest rate, the inflation rate slowed down from 16.5% in April to 15.8% in July.

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 b) Domestic Market
Russia’s domestic market was also getting into trouble. By December 2014, the gold & foreign
currencies declined by $15.7 billion, the goods prices increased by 10% due to Russia’s ban on
Western imports. Russia’s annual inflation rate grew to more than 10% along with the loss of the
largest oil company to lose the US & Euro assets and 86% of the profits. In 2015, the income per
person was only $169, equivalent to 11.574,979 Ruble.
We can see it clearer by looking at the charts below:

Annual GDP (%)

Looking closely at the annual GDP chart of Russia, it is clearly that annual GDP in 2014 began
with slowing growth, and then in 2015, the annual GDP dropped down to negative, so what is the
cause of this massive decline? According to the agency's calculations, the annual negative effect
caused by sanctions on Russia's GDP growth in the period of 2014-2018 is 0.2 percentage points.
As for the main reason, which is cheaper oil, the GDP growth rate decreases on average by 0.65
percentage points per year. IMF (international Monetary Fund) also analyzed, the tightening of
budget policy and monetary policy, respectively "contributed" 0.1 percentage point and 0.2
percentage point to the deceleration of Russian GDP. Together, these four factors have
subtracted nearly 1.2 percentage points from the annual growth rate of the Russian economy. At
the same time, Bloomberg experts at the end of 2018 calculated that, due to sanctions and a
number of other factors (such as structural changes in the economy and slowing global growth),
GDP of Russia has dropped 6% of its growth rate since 2014.

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 Annual Inflation

During the 15 years under the leadership of President Vladimir Putin, Russia successfully
reduced its poverty rate to 11% in 2014. However, this trend has been reversed. Currently up to
16% of Russians live in poverty. Western embargo and plunging oil prices have pushed Russia
into economic recession in recent years. Since the beginning of 2015, Russia's inflation rate has
skyrocketed to nearly 15%.That means the prices of Russian goods and services become much
more expensive than they were a year ago, making people's lives increasingly difficult. The
Russians were forced to tighten their belts and reduce spending. Retail sales of goods and
services in Russia fell 9.4% in June after falling continuously in all months since the beginning
of the year.

Capital Outflow (Billions of USD)

Russia in 2013 had already seen its high level of capital flight, a recurring problem for the
country, reach about 61 billion USD .In early December, the central bank estimated that capital
flight would amount to $128 billion but it was pushed higher by the ruble's steep plunge at the
end of the year on the back of falling oil prices and growing panic as people rushed to exchange
their savings. Just in the fourth quarter of 2014, capital outflows amounted to $72.9 billion,
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compared to $16.9 billion in the same period a year earlier. The central bank said that the figure
was augmented by foreign currency loans given to banks for the first time to help them withstand
the ruble's fall. Russia's current account surplus, the broadest measure of the country's trade with
the rest of the world, reached $56.7 billion in 2014, up from $34.1 billion in 2013. 

3. Russia’s Economy Policy to recover the Economy

a) Western sanctions against Russia are pulsed between Russia and the West over Ukraine
and Crimea

In this crisis, a change in economy policy must be enforced. It is known that Crimea has been
part of Russia since the 18th century, but then became a territory of Ukraine in 1954. After the
coup in Kiev in 2014, people living here held a historic referendum with the result that the vast
majority of the people supported the return to part of Russia and from that time until now, The
Foreign Ministry spokeswoman of Russia Maria Zakharova insisted that Russia would not return
Crimea to Ukraine.

b) Russia’s macroeconomics measures to solve the crisis

Also the Russian government has used a lot of macroeconomic measures to resolve the stressful
situation of the domestic economy. Russian President Putin also once confirmed that the drop in
the ruble rate will only affect the economy of this country "to some extent". On October the 3 rd,
after months of fluctuating ruble, Russia spent 980 million USD to stop the decline, this is part of
a plan to spend 30 billion USD on market intervention in October. President Putin had made sure
that Russia will not "burn" its foreign exchange reserves to boost the ruble (24/10). Russia raised
its interest rate stronger than their forecast on October 31, but this might not soothe fears that
sanctions and capital flight will damage the economy. Russian central bank removed exchange
rate controls on November 5th, the government can freely sell USD in unlimited volumes to deal
with speculators. Five days later (10/11), Russia officially announced plans to limit cash supply.
Limiting the liquidity of the ruble is a punishment for speculators, said Putin. Due to the fall in
oil price, on December 1st, Russia decided to sell 700 million USD on the foreign exchange and
three days later (4/12), President Putin placed an announcement that Russia will put punishments
on speculators.

c) Some monetary policies that been used to recover the economy

Russia also has some monetary policies to deal with this crisis. When the ruble depreciated
strongly, BoR (Central bank of Russia) adjusted its exchange rate management policy and
"attacked" the speculation in the market with strong intervention. BoR has pumped foreign
reserves into the market to support the ruble, spending up to $ 22 billion in March and up to $ 30
billion in October. The bank has also sharply raised key interest rates to support the domestic
currency, from 5.5% to 9.5%, after the increase last month. Experts say that BoR's decision to
float the exchange rate will cause speculators to lose direction in the foreign exchange market
and in the short term will help stabilize the ruble rate against the USD and the euro. Previously,
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BoR's application of a narrow margin to the volatility of the ruble encouraged investors to buy
when the currency was near the lower limit of the trading range, when BoR would take action to
push prices up. The BoR's termination of intervention in the money market also relates to the
nation's foreign currency reserves. Russia's reserves were 400 billion USD, although down from
510 billion USD at the beginning of the year, is still quite large but the country needs a buffer to
fight divestments in the context of sanctions. Besides, Russia also does not suffer any loss when
considering the revenue from oil exports at the current exchange rate. With the price of Brent oil
currently fluctuating in the range of 84 USD / barrel, the amount that Russia collected on the
exchange rate is about 45 rubles / USD is no different from the beginning of the year, when the
oil price was about 45 rubles. 110 USD / barrel (at the rate was 33 rubles / USD). Russian
President Vladimir Putin said Russia's financial agency will take the necessary measures to
stabilize the local currency. According to him, the key indicators of Russia's gold and foreign
currency reserves and balance of payments are still good, allowing it to control the situation
without the need for special measures. The Russian leader said that the unrestricted devaluation
caused by speculation of the ruble would end soon, partly thanks to the BoR's measures.

A year after the collapse of the ruble, people began to adapt to it. For example, people began to
buy cheap cigarettes, buy less cake and use electronics less often. Demand for many goods and
services declined, small entrepreneurs went bankrupt, and so did many large companies. About
15% of Russians began to expand their private farms to grow vegetables and raise farm animals.
Overseas travel has become impossible for many people - and people are turning to domestic
tourism, which has revived the tourism industry. Interestingly, the stagnation in the Russian
economy does not affect the demographic situation in the country: despite the crisis, the fertility
rate has even increased slightly.

After growing macro-stability, driven by the government’s policy response package of a flexible
exchange rate policy, expenditure cuts, and bank recapitalization, along with tapping into the
Reserve Fund, has revived facilitate the adjustment of an economy hit by the double shocks of
low oil prices and restricted access to international financial markets. The positive terms-of-trade
effect from rising oil prices, coupled with more stable macroeconomic conditions, was expected
to drive Russia’s economic recovery going forward. It was predicted that headline inflation will
continue to slow, dipping marginally below 4% at the end of 2017 and stabilizing at about 4% in
2018-2019. Real incomes, which will be the key source of real income growth, will be helped by
lower inflation. Improving market sentiments and improved credit conditions are both projected
to lead to a rise in private spending by 1.8 percent in 2017 and 2.5 percent in both 2018 and
2019, even with these improvements. The highlight changes were thanks to decelerated inflation
and household income and spending recoveries, the poverty rate is predicted to decrease: the
poverty headcount is estimated to decrease from 13.5 percent in 2016 to 13 percent in 2017, and
to continue to decrease to 12.3 percent and 11.6 percent in 2018 and 2019, respectively.
“Boosting productivity growth remains key to achieving inclusive, sustainable and fast-paced
growth in Russia,” said Andras Horvai, World Bank Country Director and Resident
Representative in the Russian Federation. “While we already see the benefits of increasing
macro-stability – not only through a return to growth, but also in declining poverty – addressing
deeper structural issues related to demography and competitiveness would enable Russia to take
full advantage of the positive momentum.

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Conclusion

In conclusion, through the financial crisis of Russia in the second half of 2014 shows us the
limitations in economic institutions that are too dependent on declaration Russian oil and gas
cascades, but are also found to be closely related the influential political actors caused this crisis.
That is political interference indirectly on oil prices and direct interventions that are for example
the act of imposition sanctions on the Russian economy of the EU and US. This crisis also shows
that there are international conspiracies aimed at Russia, after conflicts between Russia and the
West, the US on the international arena and if Russia is not well prepared, there are no reforms
of its economic development strategy in fact, it is very likely that a crisis like this will have a
chance to happen again, and perhaps its consequences would be much worse than the crisis just
now.

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 REFERENCE

Anon., n.d. Wikipedia. [Online]

Available at: https://en.m.wikipedia.org/wiki/Russian_financial_crisis_(2014–2017)

Gutterman, I., n.d. RadioFreeEurope RadioLiberty. [Online]

Available at: https://www.rferl.org/a/russia-sanctions-timeline/29477179.html

Hobson, P., n.d. The Moscow Times. [Online]

Available at: https://www.themoscowtimes.com/2014/12/22/10-events-that-shook-russias-economy-
in-2014-a42498

Huy, K., n.d. VTC News. [Online]

Available at: https://vtc.vn/2014-nam-khung-hoang-kinh-te-nga-ar193897.html

Radcliffe, B., n.d. Investopia. [Online]

Available at: https://www.investopedia.com/articles/economics/10/economic-sanctions.asp

Slack, M., n.d. The White House. [Online]

Available at: https://obamawhitehouse.archives.gov/blog/2014/03/17/president-obama-announces-
new-ukraine-related-sanctions

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 APPENDIX (A)

Event  Date RUB/USD

Euromaidan 21/11/2013 32.9975

Annexation of Crimea 18/3/2014 36.2477

Minsk Protocol 5/9/2014 37.0028

Donbas general elections 2/11/2014 43.0072

Central Bank intervention 16/12/2014 68.4910

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APPENDIX (B)

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