Russia: lessons of a crisis

Note kindly translated by Anne-Marie de Grazia


The development “model” of Russia is now under fire. It has been the result of compromises, which have been evolving since 2000. These have allowed for the strong growth of the years 2000 to 2008. Their major traits have been preserved, including during the 2008-2010 crisis. Yet these compromises seem to have reached the limits of their potential. Witness to this is the slow-down in growth, noticeable since 2013, which occasioned some reflections at the time.[1] Moreover, the present situation characterized both by a strong decrease in oil prices and by a showdown between the Western countries and Russia, renders these compromises largely inoperative. As evidenced by the sombre forecasts for 2015, like those of the Minister of Finances, M. Siluanov, announcing a recession of -4% of GDP. A new model of growth has become mandatory, as President Putin recognized in his address of December 4th. The importance of debate on this matter goes back way beyond these past days.[2]

A change of paradigm?

Following the transition of the 1990s, we have seen the emergence of new configurations between private and public actors in Russia. The crisis of 1998 had brought about a shift in favour of public actors. A compromise around the stabilization of these configurations and a consolidation of the role of the State were implemented when V. Putin took power. This compromise underwent some evolutions at the beginning of the years 2000 between “interventionists” and « liberals » inside the government, and in the Russian elite more generally. If the government kept the upper-hand over some sectors, it nevertheless opened up Russian economy to foreign capital as far as the other sectors were concerned, and it accommodated itself with the rules of financial globalisation.[3] This entailed a progressive disappearance of the hurdles to capital flows, ending in the total liberalisation of exchange rates at the end of 2006. This compromise rested on the idea that Russia would be able to use the international financial system to its own profit, in order to finance its development. It also corresponded to the wish of big Russian companies, whether in the domain of fossil fuels or of metals, to resort to external growth (by the means of acquisitions) in order to reach the size required to confront world competition.[4] But it is clear that other reasons, less avowable, tied in with exporting the industrial patrimony of Russia, were also at play. One might have grounds, too, to question a model in which Russia produced commodities only in order to later import manufactured goods produced from these same commodities.[5]

The compromise included an understanding on the measured use of financial means stemming from the income from commodities. The role of this income tended to increase beginning in the summer of 2002, offering more possibilities to the Russian government while the Central Bank was able to increase very strongly its foreign currencies reserves. In reaction to the increase in the price of oil came the statement of the four “National Priorities” as defined by Vladimir Putin in 2004 (Health, Education, Housing and agro-industrial integration). These “priorities” made it possible to channel part of the investment desired by the “interventionists,” without provoking sizeable macro-economic unbalances. The same thing applied to the investments relating to the Olympic Games in Sochi or the Soccer world cup, which made it possible to modernise transportation infrastructures. So far that Russia has been able to avoid the trap of the « Dutch syndrome » and to preserve as diversified an economy as possible[6].

This strategy paid up initially. Industrial production underwent an important renewal in sectors such as the automobile industry (where over 1,7 million vehicles were produced in 2012). The productivity of the workforce registered a spectacular increase, particularly in the industry of manufactured goods, an increase which was linked as much to investment (which was high at the time) as to the introduction of new technologies through the development of plants belonging to Western companies, or through an effect of diffusion in the Russian industry.

Table 1

Gains in work productivity of labour since 2002











Total productivity of labour










Agriculture, hunting and forestry




















Commodities sector










Manufacturing sector










Utilities networks (electricity, gas and water)




















Commercial services










Hotel and restaurant trade










Transportations and communication










Source : Federal Service of Statistics

However to some extent this compromise could be seen as an addition of not so coherent parts of opposite strategies. For sure there was an element of consistency, mostly in how this compromise was constantly revamped by the government. Yet national priorities were required to be compatible with rules established by Alexey Kudrin and German Gref. It must be noted that Alexey Kudrin, Minister of Finances, continued to oppose any massive use within the Russian economy of the funds accumulated by means of exports, pretexting risks of macroeconomic unbalances. The fight against inflation remained the cornerstone of the economic credo of the authorities, a fact which was not in keeping with the economic situation in Russia after 2002[7]. The monetary policy implemented in Russia retains the imprint of the memory of the crisis of 1998. The exchange rate was considered a good indicator of social stability in Russia. The Central Bank of Russia maintained its interventionist policy on the FOREX market till December 2013.

This lead to interest rates in rubles going sky-high and being far superior to what was required by the development of the economy. This constituted a new incitement to go look abroad for the financial resources necessary to develop the economy. Another consequence of the financial as well as monetary policies inspired by Kudrin, but also by the authorities of the Central Bank of Russia, was a sharp appreciation of the real exchange rate of the ruble. This appreciation, which favoured the decrease in inflation in Russia and advantaged the upper strata of consumers, was compensated for by gains in productiveness in industry. It nevertheless penalized industrial and agricultural producers, that is, foremost the non-rent sectors of the economy.

Chart 1

Nominal and real exchange rates of the Ruble against the Dollar

A - GR1 exp Angl

Data of the RCB and calculations carried out at CEMI

Yet, one could already see cracks begin to appear in this compromise. Alexey Kudrin’s declaration at the end of January 2008 about the role of Russia as a « haven of stability, » when worries were mounting in relation with the crisis of the subprimes, was witness to the illusion that this strategy was durable[8]. The indebtedness of large companies and of Russian banks on the international financial markets would reveal itself to be a real problem when the ruble decreased strongly in value during the financial crisis of 2008. The world economic crisis (2008-2009) constituted indeed the first challenge to this strategy. The State had to rush to the help of companies too dependent on international liquidities or having underwritten sizeable loans, which they could no longer repay. The years 2010-2013 were characterized by the « illusion » that a return to such an equilibrium would be possible. But this illusion has at present dissipated. From this resulted a new increase in indebtedness of industrial companies and of banks. Of course, this indebtedness also corresponded to the purchase of sizeable assets, and the structure of assets and liabilities of companies was balanced. Still, the difference in temporalities between assets and liabilities exposed banks and Russian enterprises to considerable difficulties in the case of an important decrease in the value of the ruble.

Table 2

Gross external indebtedness of the Federation of Russia (liabilities) in billion dollars






Total indebtedness to non-residents





Government of the Federation of Russia










Other financial agents





Other agents





Of which Credits





As a percentage of the whole
Government of the Federation of Russia










Other financial agents





Other agents





Source : Central Bank of Russia

The Russian government has indeed deployed much effort in order to re-orient the international trade of Russia towards Asia and to develop a free-trade zone with some of the countries of the former Soviet Union. The principle of a diversification of trading partners is a judicious one. It is clear that Russia, of which Europe is the first trading partner, has partly “imported” the recession or stagnation which the European continent has been undergoing since 2012 and which it risks suffering under for several more years. This situation has been perceived only progressively among the Russian economic elites. But it has brought about an important change in the strategy of the government. From this point of view, one can talk of a pragmatic readjustment of the economic policy of Russia[9]. In fact, it raises the problem of a possible « de-globalization » of the Russian economy and, through this very fact, a re-examination of the balances perceptible in the development strategies. If one wants to reorient the development model towards a more « self-centered » economy, it is obvious that the growth in real income of the population, of consumption and of savings, will become more relevant indicators in steering the economy than classical macro-economy indicator including the inflation rate. This will imply a more “social” turn of the political economy, for the repartition of income will in time become as important as the evolution of its mass if one wants Russia’s economic growth to be fostered by internal consumption.

Consequences of political changes of 2014.

The relations between the United States, the European Union and Russia have degraded considerably since the beginning of 2014. Not that they had been good before. The contradictions among foreign policies have been flagrant for about three years. Yet the Russian initiative on chemical weapons in Syria had shown that collaborations were possible. These collaborations are necessary, be it for the United States, who cannot disengage from Afghanistan without the implicit support of Russia, or for France, who is largely tributary of Russian means of heavy air-transportation for its operations in Africa. The responsibility for this degradation is to be sought more with the United States and with the European Union[10]. The mechanism of sanctions and counter-sanctions, which is presently operating at full stride weighs heavily on the anticipations of the various economic actors, particularly in Western Europe. Losses in growth could reach 0,5% of GDP in Germany, 0,25% in France, but, too, 0,8% in Hungary and 1% in Poland. Considering the current low rate of growth in some of these countries this is quite a significant impact.

The various stages in the sanctions process, as well as the answers it elicited from the Russian government, are building a particular psychological context, the importance of which goes way beyond the real effects of the measures taken on either side. On the side of the United States and of the EU countries, we have a set of measures including the domain of industrial cooperation as well as the one of financial transactions. It is the latter sanctions, which seem by far the more important. The United States have decided during the month of July to extend the sanctions to the defence sector, affecting the state company of ship-building (OSK) and the state company of airplane construction (OAK). We have then the sanctions that fall under the SSI regime of sectorial sanctions.[11]  It bans Russian companies from borrowing for more than 90 days on the international financial markets. These sanctions prohibit the increase of the external debt of private enterprises as well as the roll-over of this debt when the latter reaches maturity. This, of course, produces a sharp penury of dollars in Russia, when the needs of companies are considerable and specifically for the two last quarters of 2014 (Table 3). This sharp penury of dollars has driven down the ruble to a considerable extent since the end of last November. But, we can see that the situation is to ease by the beginning of 2015.

Table 3

Amount of repayments per quarter

T3-2014 T4-2014 T1-2015 T2-2015  T3 2015  T4 2015  T1 2016  T2 2016



























Source : Central Bank of Russia

A spectacular drop of oil prices considerably aggravated this situation. Oil prices had been of 110 USD a barrel at the end of 2013. They went down to around 60 USD. This sizeable decrease (-45%) is probably linked in part to the temporary oil glut the market has experienced because of the surge of shale oil in the USA. It is also true that oil prices could have been manipulated by the US government to weaken Russia. But other phenomena have also come into play, such as the will of the big oil producers (with Saudi Arabia in the lead) to limit the development of the production of oil from oil sands in Canada or shale layers in the United States. Both these industries have a threshold of cost-effectiveness of at least 60 USD a barrel, and probably it is more probably around 80 USD[12]. The combination of these two factors, the American financial sanctions and the fall of oil prices have fuelled a huge speculative attack against the ruble and provoked the December crisis on the exchange rate. But this crisis is revelatory of a deeper crisis in the growth model or more precisely of its inconsistencies between the “liberal” part and the much more “interventionist” one. The crisis could nevertheless benefit in the end Russia through a switch toward a much more consistent model aiming at the complete economic independence of the country.

The shock on the exchange rate at end of December and its consequences.

The exchange rate of the ruble began to depreciate since January 2014 when the Central Bank stopped its interventions. This movement corresponded in part to the former overvaluation of the ruble, and it was natural. But since the beginning of July, this depreciation accelerated progressively until the spectacular events of December 12 to 18, 2014, which are linked to a speculative attack. The consequences on the Russian economy are known: an inflationist shock because of the brutal hike in the price of imported goods, an important reduction in investments for the same reason and a temporary interruption of said importations because of the uncertainties about the exchange rate. It is evident that this will entail a temporary recession in Russia during the first semester of 2015.

Yet the policies of the Central Bank of Russia have also had negative consequences. The Russian authorities have decided to fight off the speculative attack with the instruments of the market and not through the reestablishment of capitals control. This implied a strong increase in the interest rates (from 10,5% to 17%). These policies come at a cost. Should this hike endure, they would strangle the Russian economy, and investment in particular. If a policy of fighting the speculation by market means can be effective, as has been proved on Wednesday December 17 and Thursday December 18, the cost, direct as well as indirect, of this policy goes rapidly increasing. In the mind of the government, this strategy is not destined to endure. It clearly hopes that come next January the downwards pressures on the ruble will calm down. Still, should it turn out that speculation is actually politically fostered by some countries, as recent fluctuations on the FOREX could reveal, this might not be the case. In this situation, the best solution would be for Russia to rapidly introduce regulatory measures for capitals, despite the fact that the authorities are refusing for now to consider this option. But if the engagement of the Ministry of Finances and of the Central Bank in favour of the ruble should continue, one would then have to seriously reconsider the diverse possible options.

It is moreover evident that Russia cannot go on financing itself abroad, while counting on the vastness of its commodities exports to balance its accounts. This is raising again the issue of natural resources so abundant in Russia. They constitute an indisputable asset for economic development[13]. But this asset is to be clearly understood in the frame of a true development policy. This raises the issue of their prices and more precisely of the fluctuation of their prices. The constant increase in the number of option and derivative contracts has created a huge instability of prices linked to the “over-the-counter” (OTC) practices[14] making commodities market the natural prey of speculation. This is mainly the result of a growing market derivative activity in commodities. The net volume of commodities derivative “over-the-counter” contracts increased 14 times from 1998 to 2006. Future and option contracts increased too very quickly from 2004 to 2007. In the end we are seeing a huge discrepancy between volume of derivatives (future and options) traded and physical volume of commodities actually traded (in US Dollars)[15]. This phenomenon is having special an impact on commodities markets and added major a factor of prices volatility[16]. This of course raises the value of processing most or even parts of these raw materials with the aim to either raise the valuation relatively to more processed goods or to reduce the price volatility[17]. The necessity to develop processing industries making use of these raw materials and semi-processed goods is to be a distinct priority for Russia. The impetus of this policy is of course to be different according to the situation of these goods. But it would give Russia a much more healthy kind of growth and one much less dependent of foreign economic (and political) development. Nevertheless such a policy is in turn raising another issue: how to fund such a development. Internal financing is possible and to some extent even mandatory now. But it demands that efficient mechanisms for repatriation of export profits as well as for their distribution within the whole economy be rapidly put into place. Here we connect with the long-standing issue of a true banking reform in Russia. One can see the strategic dimension of the exchange rate, but also that of a well-performing banking system. To some extent the current situation could be used to implement such a banking reform. A return to capital controls would give a free hand to the regulator for implementing such a reform.

As long as one considers that the ruble is to be stabilized by market means, such a policy will encounter serious problems. Interest rates will remain high and will largely deter investment but also the switch toward a more diversified economy. Very high interest rates are curbing, or even hindering the Russian economy from diversifying and from profiting from the depreciation of the ruble, which renders Russian producers more competitive, be it in exports or on the domestic market. One can see then that it is not so much the crisis in the exchange rate than the methods used to counteract it which risk plunging the economy into recession in 2015, at a time when industrial production was undergoing a significant bright spell thanks to the depreciation of the ruble (chart 2).

Chart 2


Shifting data (YtoY)

Source : Central Bank of Russia

The Central Bank of Russia and the Ministry of Finances then appear as the main obstacles to a diversifying of the Russian economy and one of the main factors in producing the recession. Evidently, one must from now on reflect about a new logic of growth, which we have evoked over a year ago[18].

There exist intermediary solutions between capitals controls and the present situation. If its turns out that the Central Bank persists in maintaining high interest rates, the government could decide to take over some of it in order to alleviate the load weighing down on Russian companies. Measures of this kind, called “bonification of interest rates,” were applied in France in the 1960s. But their budgetary costs are high. Similarly, the government can decide to commit sizeable investments into infrastructures or by opening subsidy-accounts of which Russian companies could benefit. We know that such subsidies have already been decided, affecting agriculture. This could make possible the development of companies in the sectors of technological innovation. Still, it is clear that such measures will end up reinforcing the weight of the State in the economy.

For all purposes, this weight is bound to increase in the present circumstances. Only a strong impulse issuing from the State can restart the economy after the shock it registered in December. If such an impulse is administered, after a bad first semester, growth might restart during the second. Over the year 2015 one might be able to limit recession to -1% and forecast a growth of around 3% for 2016. Everything, here, is much depending of government action. The success in crushing the speculation could turn into an elusive one would necessary measures not to be taken. However, it is important to understand that it is no longer a matter of temporary measures, dictated by sheer necessity and a temporary crisis, but that this measures must lead to a shift in the model of growth for Russia. The activity of transformation of commodities, but also the innovation activity, must progressively gain in importance. In that sense the current situation could largely benefit Russia and lead to its transformation into one of the major XXIst century world power. Such are the stakes in the present debate about economic policy and not just the factual growth for 2015.

[1] Glazyev S. Yu. and Fetisov G.G., (2013) « On the strategy of sustainable development of Russia’s economy » in Economic and Social Changes, n° 25 (1/2013), pp. 18-28.. Vercueil J., (2013) «Russie : la «stratégie 2020» en question. Une analyse du substrat productif et financier de la politique industrielle», Revue d’Études Comparatives Est-Ouest, vol. 44, n°1, pp. 169-194.

[2] Ivanter V.V. Nekipelov A.D. and Glazyev S.Yu (2013), « Problemy Dolgosrotchnogo Sotsial’nogo-Yekonomitcheskogo Razvitija », Yekonomitcheskie i Sotsial’nye Peremeny n°30 (6/2013), p.14-25. Also available on

[3] Clément-Pitiot H. (2011), «L’insoutenable légèreté de la globalisation financière», Revue de Défense Nationale, 2011, pp. 33-42

[4] Durand C. and M. Lautier, (2013) « Too Big Too Quick? An Institutional and Systemic Overview of the Rise of Russian Metallurgical Transnationals», Revue d’économie industrielle , n°142, 2012/2, pp. 41-76

[5] Sapir J. (2011), « Soglasovanie vnytrennykh u mirovykh cen na cyr’evye produkty v strategii yekonomitchekogo razvitija Rossii », [ Dynamiques des prix mondiaux et internes des matières premières dans la stratégie de développement économique de la Russie] in Problemy Prognozirovanija, n° 6 (129), 2011, pp. 3-16

[6] Oomes N and Kalcheva K., (2007), Diagnosing Dutch Disease: Does Russia Have the Symptoms? Working paper of the FMI/IMF, WP 07/102, IMF, Washington DC

[7] Sapir J., (2010), « What Should Russian Monetary Policy Be » in Post-Soviet Affairs, Vol. 26, n° 4, Octobre-Décembre 2010, pp ; 342-372.

[8] Sapir J. (2008B), « Vozmozhnosti i Riski ‘Gavani Stabil’nosti’ »  [Possibilités et risques d’un « havre de stabilité »] in Rossija v Global’noj Politike, n°2/2008, mars-avril. Consultable aussi sur le site,

[9] Clément-Pitiot H. (2014), «La stratégie de l’économie russe en perspective: le choix du pragmatisme?», Note de l’Observatoire franco-russe, 2014, n°6, 26 p.

[10] Mearsheimer J., « Why the Ukraine Crisis is the West’s fault », Foreign Affairs, septembre/octobre 2014, .

[11] Office of Foreign Assets Control (2014), Sectoral Sanctions Identifications List, 16 juillet 2014, U.S. DEPARTMENT OF THE TREASURY 1500 PENNSYLVANIA AVENUE, N.W. WASHINGTON, D.C. 20220

[12] Rystad Energy, Morgan Staley Commodity Research. Some sources refer to a real cost at above 80 USD for shale oil.

[13] Sapir J, Internal versus World Prices in Raw materials, the development strategy and the developing of the manufacturing industry of Russia, note posted on the RussEurope blog in 2012,

[14] Over-the-counter contracts are bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps have been prime examples of such contracts. These contracts are developping very fast in commodity markets. They are mostly done via the computer or the telephone. For derivatives , these agreements are usually governed by an International Swaps and Derivatives Association agreement.

[15]  Data from: Bank for International Settlements, Semi-annual OTC Derivatives Statistics, December 2006, Basel

[16] Bank for International Settlements, BIS Quarterly Review, vol. 26, (June 2008)

[17]  Alquist R., and L. Kilian, “What do We Learn From The Prices of Crude Oil Futures” in Journal of Applied Econometrics, Vol. 25, n°4, 2010, pp. 539-573.

[18]  Ivanter V.V., Uzyakov M.N, Ksenofontof ,M. Yu., Shirov A.A., Panfilov B.S., Govtvan’ O. Dzh., Kuvalin D.B., Porfiriev B.N., « Novaya Yekonomika Politika – Politika Yekonomitcheskogo Rosta », (2013), in Problemy Prognozirovaniya, n°6 (141), pp. 3-16.

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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