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Thursday, February 5, 2015

Five Reasons the Russian Economy Won’t Return Soon

The Russian economy is in the tank and the IMF projects the economy will shrink 3.5% this year and land somewhere between +1% and -1.5% in 2016. The Russian economy has a number of things working against it, of which current escalating showdowns with the West is only one.  Problems areas such as diversification, politics, resources, time, and world economy are likely to hinder growth beyond that which is projected by the IMF. 

Economic growth requires a number of elements to come together at once to create the right environment. Change in the Russian economy has been needed since the last drop in oil prices but little has been done to rectify the situation. Simply waiting for the oil prices to rise is not a wise strategy as new sources of energy hit the market. The Russian economy may be in this for the long haul as they are unable to make the reforms needed to change their economic structure.

Lack of Economic Diversity:  The Russian economy is excessively reliant on its natural resources in the form of gas and oil. Nearly 50% of the Russian economy relies on these exports for revenue (1).  Strong economies move away from heavy reliance on natural resources and move to diversify their income sources into other areas. With little manufacturing, other sources of industry revenue, and an entrenched economic position it is unlikely Russia will be able to whether its current problems quickly. 

Political Environment: The Russian government has significant power and stake in the private sector.  Despite moving more toward a free economy from its Soviet past nearly 50% of people still rely on the government for their livelihoods (2).  Doing business in Russia can be difficult with politics, power, and money playing a significant factor in business-government decisions. Investment and innovation are slower in controlled economies. 

Lack of Financial Resources: Russia’s 500 billion cash reserves dropped below $380 billion (3). With money running out it is doubtful the nation can spend its way out of its current financial crisis and will need to rely on investments to improve its position. The problem is that investments in the current political crisis are not likely and this will prolong the countries current position. 

Out of Time:  Time is not something the Russian’s have on their side. The oil price is already below $50 per barrel and is likely to stay that way for the near future. There isn’t time to diversify, change government, swoon investors, and redirect the gears of the Russian economy. It appears that the Russian people will need to hunker down in their homes until the current political and oil crisis pass over. 

World Economy: The world economy is also experiencing slower development and growth. As nations cut back on their imports and attempt to balance their own budgets  customers will be making less purchases putting another wet blanket on their economy. In the context of a slower global economy the Russian economic engine will be stalled due to the environment in which it exists.

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