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Russia is the First BRICS Country to Forecast Negative Growth (-0.8%) for 2015 Following the Fall in Oil Prices.



By Marcello Conti


Milano—Sunburst Africa–On Monday December 8th 2014, the rouble recorded a new all time low together with its largest single-day decline since the Russian financial crisis of 1998. It all started viral. It wasn’t an infection or a fever but it’s not inapprorpiate to call it a virus. We are talking about the close relationship between the russian currency and the price of Brent shown by the most popular website in Russia right now. It shows the rouble-dollar exchange rate, the rouble-euro exchange rate and the price of Brent in real time and it’s said that even Elvira Nabiulina, Chairman of the Central Bank of Russia has set the website as her homepage.

How did it happen?

The event was not an out of the blue record, the clues of the fall in the value of the Russian currency (-40% from January 2014 to present) were visible to all but the decision not to reduce OPEC oil production gave perhaps the final blow. Earlier this year, the price of Brent crude oil exceeded $ 105 per barrel and now fluctuates around $ 63. A major decrease that has heavily influenced the Russian economy, particularly vulnerable to fluctuations in oil prices since the impact on GDP of the oil and gas sector is approximately 40%. The economic development ministry of Russia reduced its GDP growth forecast for 2015 from 1.2% to -0.8% on Tuesday this week. An inexorable decrease due to a cyclically weak domestic economic environment made even more critical by the geopolitical tensions that have characterized the last months. Last week, for the first time since November 10, when the currency was allowed to float outside of its fluctuation band, the Russian central bank intervened with $ 700 million to ease the pressure on the ruble. For a second time last week, according to reports from Russia, Moscow has doubled its intervention by a further $ 1.5 billion. In the comming month further interventions are estimated to be between 10 and 30 billion dollars. This will result in a depletion of national reserves. If the picture does not sound bleak enough- lets look at what is happening to interest rates and inflation in Russia.

The consumer price index increased by 8.3% per year in October 2014 and according to the Central Bank of Russia, inflation will reach the double digits in the first quarter of 2015, a worrying level for the economy, still struggling with economic stagnation.

This is worsen by the fact that actions on interest rates to counter inflationary pressures would have the effect of slowing down even more the GDP growth already forcasted at negative 0.8 percent by the central bank. Suprisingly, in his address to the nation last week, Putin did not mentioned the recession expected next year or the problem between the weakness of the rouble and the inflation. On the contrary, the government hope to contain the CPI at 4%, despite not providing a recipe on how it intends to achieve the goal.

So what?

Investors in south africa will have to continue to watch what is happening in Russia as the SA economy is not imuned to such impact. We have already seen our growth forcast for 2014 downgraded from over 3.4% in January to 1.4% now. Current crisis at Eskom, the falling value of the rand, huge unemployment may push growth rates downward below 1% in 2015 if the situation is not reversed.


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