What next for the Russian economy?

It’s incredibly difficult to predict where the Russian economy is likely to head next, so we’re not going to try and add our limited voices to the general chatter that currently surrounds this topic. However, we are happy to collect together the views of analysts (both economic and political) to try and build up a clearer picture of the road ahead.

The credit agencies provide a useful starting point and you may well have noted that Moody’s decided to downgrade the Russian credit rating last month. The reduction saw a fall to Ba1, which is sometimes known as “junk status” in financial circles. The credit agency made it clear that their decision was related to political uncertainty within the country.

On its own, this might seem like something of a concern. But bearing in mind that S&P recently made the same judgement call and it becomes clear that there is a general view that the future looks pretty bleak. The crisis in Ukraine and the international sanctions that are in place are felt to be having an impact, while the credit agencies continue to suggest that things may yet get worse.

Russian politicians have suggested that the credit agencies are unnecessarily pessimistic, with the Finance Minister pointing out his own view that the situation is nowhere near as bad as Moody’s are suggesting. It’s also noted, however, that Russian government ministers have reacted strongly in recent months to the threat of increased sanctions.

Meanwhile, EU leaders have come under some pressure to keep the sanctions in place, in order to try and influence the situation in Ukraine. EU sanctions are due to end this summer, with some European governments apparently keen to see them lifted, in a positive reaction to the ceasefire in Ukraine. It’s clear, however, that there are others within the European Union who remain less convinced about taking such immediate action.

Those sanctions have had a knock-on effect for a number of Eastern European states and there is an acknowledgement that governments in Bulgaria, the Czech Republic and Hungary have mentioned that their own countries are feeling some pain. Many German companies, with close trading links with Russia, are also believed to have been adversely effected by the sanctions that are in place.

The Russian Rouble is currently priced at more than 60 to 1 Dollar, which represents a truly remarkable rise. Just 12 months ago, the exchange rate stood at little more than 35 Roubles to the Dollar. As might be expected, given the circumstances, the inflation rate is also rocketing. The reported annual rate exceeded 16% in February, having stood at less than 7% in April 2014.

Looking at the various pressures on the Russian economy, it seems that analysts are in broad agreement that there is likely to be uncertainty ahead. With high rates of inflation, low oil prices and continuing sanctions, there may not be much light at the end of the tunnel. However, those European nations that are also suffering as the sanctions continue may wish to bring about a change of direction.

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