Russia coming out of the crisis

Note kindly translated by Anne-Marie de Grazia

We have been told day after day that the economic situation in Russia was frightening. But the economic situation in Russia is far from catastrophic. As has been discovered, with great bitterness and no little astonishment, by Western analysts. Indeed, until these past days, such was not the discourse in the Western media, particularly in France and in the United States. Yet, truth is finally filtering through. A chronicler at Bloomberg just coughed up the morsel[1]. Make no mistake, Matthew Winkler’s paper concentrates on investment opportunities in Russia. But his tone is in sharp contrast with what one could read and hear over these past months concerning Russia. The country is now becoming a “land of opportunities.” There is no longer any question of a “default,” or of any other kind of catastrophe. We can now measure the amplitude of the disinformation to which we are subjected concerning the economic situation in Russia. But, after a while, the absurdity of the situation is coming to light.

Russia, a promised land of investment ?

Matthew Winkler’s article emphasizes two important elements. On the one hand, the yield of loans underwritten by Russian companies is presently high. It is getting close to 7.3%, whereas the yield of « corporate » loans, such as measured by the MSCI Index of emerging markets amounts only to 1.7%. On the other hand, the depreciation of the rouble, which has been considerable, leads to equities in Russian companies (stocks and bonds) being cheap. So that, with the rouble tending to appreciate, and the results of Russian companies remaining good, an investor can hope to win on both fronts, on the currency exchange (where he can expect an appreciation of at least 10% of the rouble) and on the value of equities. Winkler also notes that 78% of companies listed on the MICEX (the Moscow Stock Market index) have increased their market shares considerably more than the average of the companies of emerging countries.

These various elements are largely the indirect effects of the depreciation of the rouble, which has whipped up the productiveness of Russian companies. Moreover, the data of the past ten years show that the gains in productiveness of the Russian industry are very sizeable, and largely superior to those of other industrialized countries, with the exception of China.

Table 1

Annual gains in productiveness of labor since 2002

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Total Productiveness 107,0 106,5 105,5 107,5 107,5 104,8 95,9 103,0 103,8 103,1 101,8
Agriculture, hunting and forest economy 105,6 102,9 101,8 104,3 105,0 110,0 104,6 90,0 115,1 98,0 104,7
Commodities Sector 109,2 107,3 106,3 103,3 103,1 100,9 108,5 100,6 102,7 100,0 101,7


108,8 109,8 106,0 108,5 108,4 102,6 95,9 108,3 105,6 103,0 102,7
Construction 105,3 106,8 105,9 115,8 112,8 109,1 94,4 98,7 105,2 100,1 97,4
Commercial Services 109,8 110,5 105,1 110,8 104,8 108,1 99,0 98,8 101,9 102,5 100,7
Transportation and communication 107,5 108,7 102,1 110,7 107,5 106,4 95,4 102,4 105,4 102,1 101,6

Source : Federal Service of Statistics

All this confirms the presence of a strong industrial potential. In such a framework, one can understand Russia being presented as a “land of opportunities” for foreign investors. Of course, the question must be considered of a possible extension of the sanctions, particularly in the financial domain. This will compel investors to forego the currencies, which risk being the vectors of such sanctions, such as the US Dollar and the Euro, and to operate in other currencies, such as the Chinese Yuan. This is now possible thanks to the development of a market for the Yuan in Moscow, open to non-residents. This market has by the way just undergone a new extension, with the opening of a compartment for futures quotations for operations in Yuan. We had a good exemple in the latest loan asked by the French company TOTAL for developing its activities in Russia, amounting to billion 15 USD, and made in Yuan. This should dispose of the necessity to use either the dollar or the Euro for the forward covering of investment operations.

This assessment of investment opportunities existing today in Russia compels one to re-examine the surprising resistance of the economy to the speculative shock, which it underwent in December 2014. As a matter of fact, this resistance sheds light on the dynamics of a gain in depth and a diversification of the economy of which we have been aware since the beginning of the years 2000 and which has remained widely ignored by a number of commentators. This explains why the Russian economy is presently far more robust than it was in 1998, or even in 2008.

The December crisis and stabilization.

We remember the speculative crisis of December 2014. It translated into large and erratic movements in the exchange rate of the rouble between December 12 and 26. These movements were countered by a decisive action on the part of the Central Bank of Russia of which we gave an account on this blog. The “counter-speculation” launched by the CBR with the support of the Central Bank of China allowed it to inflict very severe losses on the speculators. But these movements have much rattled the confidence, which the Russians had, not in their currency, but in their banks. As a matter of fact, when at the worst of the crisis the rouble was negotiated at 77 roubles for 1 dollar on the « spots » markets, and at 67 roubles for one dollar at the level of sellings by the Central Bank, some banks did not hesitate to post exchange rates for private individuals amounting to 140 to 150 roubles for one dollar. This is what led to the effervescence around consumer goods in mid-December.

This speculation also imposed on the Central Bank of Russia to take restrictive measures and, for lack of having put in place a system of capitals controls, it attempted to circumvent speculation by hitching up spectacularly its interest rate. One can regret that capitals controls were not utilized. They are a far more efficient weapon when faced with purely speculative movements than the « market measures » which were resorted to in Russia. It is clear that the CBR was taken by surprise by the sheer amplitude of the speculation and that for a moment, its directorate gave in to panic, as can be seen from the movements of interest rates. The latter went up, from 11% to 17%. But, in reality, even a rate of 17% presents only a puny cost in the case of an operation lasting only a few days and where the anticipated speculative gain can reach 10% to 20% of the sums engaged (and borrowed). This situation forced the CBR to intervene directly on the market, by massively selling dollars in order to trigger a « counter-speculation », as we have said. This policy has been effective. By December 26, the exchange rate was back where it had started.

But due to the loss of confidence of the Russians in their banks, downwards pressures have continued to work on the rouble (chart 1).

Chart 1

A - Gr1

Source : Central Bank of Russia

The latter depreciated, but in a slower way than at the beginning of February. Then, it started to slowly appreciate. Presently, it seems to have returned durably to a rate of 60 roubles for 1 dollar and the upwards pressures will continue to push it probably up to 52-55 roubles. And this at a time when the Central Bank has begun to reduce its interest rate, which went from 17% to 15% then to 14%. This is proof that trust is slowly coming back. The deposits in banks have begun to increase again, (+3%) during the month of February. Moreover, the decrease in the payments due to foreigners by Russian companies and banks during 2015, in comparison to what they had had to pay back during the 2nd half of 2014, is another factor in the appreciation of the rouble.

As we have already signalled on this blog, we must therefore expect the rouble to appreciate. The movement will be weak as long as the prices of oil will remain depressed. But these prices are in the process of provoking a true economic catastrophe in the sector of shale gas and oil. This can be seen when comparing the variations in the number of rotating drill-bits in North America since the summer of 2014.

Table 2

Number of drillings using rotating drill (United States and Canada)

Zone 15/08/2014 13/03/2015 Change
TOTAL United States 1913 1125 -788
Canada (terrestrial) 397 216 -181
Canada (Offshore) 4 4 0
TOTAL CANADA 401 220 -181
GRAND TOTAL 2314 1345 -969

 Sources : Baker-Hugues

See Sapir J., « Il y aura du sang » note posted on Russeurope, March 23rd, 2015,

We can therefore expect a fall in production in North America beginning in June-July 2015. The price of the barrel should climb back up (in the case of the BRENT) to around 70 dollars a barrel. This should correspond to an exchange rate for the rouble at 42 to 45 roubles for 1 dollar. But we must take into account both the loss of confidence of the Russians in their banks (which could justify an exit of capitals out of the rouble) and, to the opposite, the upwards pressures which will come from the attractiveness of investment possibilities in Russia as soon as the foreign operators will have understood how to circumvent the sanctions mechanisms. This makes for the potential range of stabilization of the rouble being in fact rather broad, going from 50 roubles for 1 dollar (at the lowest) to 35 roubles for 1 dollar (at the highest).

This uncertainty about the range of stabilization of the rouble will certainly favour yet more erratic movements in the exchange rate. This is why we insist on the necessity to implement measures of capitals controls, in order to avoid movements, be they upwards or downwards, the destabilizing power of which upon the economy remains considerable. We are reminding here that even the IMF recognizes the necessity of capitals controls in emerging countries, in the presence of sizeable uncertainties.

The real economy is swallowing the exchange rate shock.

But the most interesting point remains the reactions of the real sector. 2015 was announced to be a disaster year. One may conjecture that some analysts in the United States were indeed wishing for a disaster year, in the hope that massive economic difficulties would fuel a potential hostility against the power of Vladimir Putin. Even the minister of Finance, M. Siluanov, forecast in January a decrease in GDP of around 4%.

However, we are beginning to realize since the beginning of March that the real sector is digesting the exchange rate shock far better than some had thought. The fall in GDP should not exceed 3% during the 1st quarter 2015, and hover around -1.5%/-2.0% for the year 2015. One cannot even exclude, should oil prices rebound faster than expected, that the year 2015 could finish with growth in the 4th quarter. Forecasts have also been readjusted for 2016, when a growth rate of 1.5% minimum is expected. As one can see, the Russian economy is digesting much better the exchange rate shock it went through.

The cause of this resistance is double. On the one hand, households are keeping up their levels of consumption, despite the price hikes related to imported products, and on the other hand, employment is remaining relatively stable. Unemployment has progressed only little, from 5.2% to 5.8%. Over the whole year it should hover at worst around 6.5%. It is important to remember that in 2009, at the time of the financial crisis, it had reached 9.9%.

The reasons for this resistance to the shock of the exchange rate are multiple. First of all, the Russian industry has greatly improved it competitiveness thanks to the depreciation of the rouble. It is maintaining a good level of activity.


Chart 2

A - Gr2

Source : Federal Service of statistics


Then, the so-called « anti-crisis » measures taken by the government are beginning to bear fruit. Granted, the process is slow, and uneven according to the sectors considered. A worrisome straggling slow-down seems to be affecting agribusiness (food-processing) and agriculture. But, all over, the measures are having a positive effect. Finally, the decision of the CBR to lower interest rates rapidly, and without waiting for a significant drop in inflation (which should reach a ceiling in March around 16.5% relatively to March 2014 before decreasing sharply beginning in May) is a strong signal that the authorities are quite decided to use all means possible to maintain production at a high level.

Adapting process in the economy.

It is important to note that the Russian economy is in reality adapting to the sanctions and to a relatively hostile international environment. Companies have changed suppliers, preferring the countries of the Far-East (Taiwan, China, Japan) to the Western countries. We notice a similar phenomenon concerning financial fluxes and the Chinese Yuan is now occupying an ever greater space in investments. From this point of view, there is a coherence between the economic and the ideological evolutions which are concentrating on the question of « Eurasism, » a theme which has become fashionable since the beginning of the 1990s [2]. One may wonder up to what point this accelerated economic transformation has not also occurred in response to what Russian leaders have perceived as a « threat of war » coming from the United States[3].

This is the framework within which one must consider this double movement, both of an integration at the « Eurasian » level, as witnessed by the cooperation program for infrastructures of transportation, signed between Belarus, Russia, Kazakhstan and China, and of an interpenetration of the BRICS, which is materializing in the creation of a new development bank, the Asian Bank for Investments in Infrastructures (ABII). This creation was decided at the BRICS summit in the summer of 2014. After a first deposit made by the Chinese of 50 billion dollars, the capital of this bank is expected to double with the contributions of the other participants, which should allow it to reach a total of 100 billion. This sum amounts already to 2/3 of the capital of the Asian Development Bank, which is an emanation of the World Bank. [4] This new independent banking institution will have its headquarters in Shanghai, the presidency will be rotating, and India should be taking on the presidency first. Similarly, one must take note of the Contingent Reserve Agreement (RCA) also emanating from the latest BRICS summit. It should potentially constitute the future IMF for the BRICS. The aim is to constitute a security net in case of financial shock and a crisis in the balance of payments, for instance if the currency of one of the countries came under speculative attack. This double integration, going hand in hand with Russia’s ambitious projects of modernizing its economy, results in providing the latter with an economic depth which largely shelters it from outside short-term perturbations, such as those resulting from the crisis in Ukraine.

The Russian economy is therefore taking a 180° turn which will bring it to develop ever closer links with the countries of Asia and the emerging countries. The only effect of the sanctions will have been to speed up a movement, which was foreseeable over the next ten years. But the impact of this movement on some European economies is already revealing itself to be considerable. The market losses for the German, French and Italian industries will be very difficult to reverse. In fact, at present Russia can even indulge in considering lifting some of the counter-sanctions which had been taken in retaliation and which have hit hard the economies of countries such as Hungary and Greece.

It appears therefore that if some were hoping that the sanctions would bring about an ample social crisis in Russia, which could have destabilized Vladimir Putin, their calculations did in no way take into account the considerable resilience of economic structures in Russia. The failure of these calculations, confirmed by the opinion polls about the popularity of Vladimir Putin[5], are leading the United States and the European Union to the following dilemma : must one maintain, or even reinforce the sanctions, of which one can well see that they have had only little effect, or must one come to admit that the policies of sanctions have been a deep mistake? This dilemma should become ever sharper in the months to come.


[1] Winkler M.A., « Russia rebounds, despite sanctions », 20 March 2015, Bloomberg,

[2] The origin of this curent is older, in fact. Voir : N. Riasanovsky (1967), The emergence of eurasianism, in California Slavic Studies, Berkeley, volume IV

[3] Glaziev S., « The Threat of War and the Russian Response » in, Russia in Global Affairs, 23 septembre 2014,

[4] David Pilling, «The Brics bank is a glimpse of the future » on the Russian television site, 30 July, 2014

[5] Le point-AFP «Russie : la popularité de Poutine atteint un nouveau record», Le Point, 07/08/2014


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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