Four of the Fundamental Reasons Russia’s Economy Is Circling the Drain

Photo credit: Shutterstock

Photo credit: Shutterstock

TheBlaze (Dec 16) — It’s a familiar specter of the Americans psyche: The Russian bear looming threateningly, with a tough military exterior…and a sickly economic underbelly.

Is modern-day Russia, like the Soviet Union before it, barreling toward a meltdown?

Here’s a look at four of the major economic challenges Russia is facing:

1. Low oil prices

Russia is hugely dependent on the price of oil. As Morgan Stanley’s Jacob Nell put it, “Since oil and gas account for 67 [percent] of Russia’s exports and 50 [percent] of federal budget revenues, oil prices drive the country’s economic cycle.”

With oil prices dropping nearly 50 percent in the second half of 2014, Russia’s government has been hard-pressed to make up the lost revenue. One solution: pretend the problem doesn’t exist, as the Russian parliament did in October when it passed a budget ”based on an alternate reality.”

2. Western sanctions

Russia’s finance minister has said the country is losing roughly $40 billion annually as a result of international sanctions, which came as a response to Russia’s military adventuring in Ukraine.

In some cases, sanctions have had truly bizarre fallout effects.

As TheBlaze reported in October, Russia responded to sanctions by clamping an embargo on Western food imports, resulting in dramatically higher food prices in Russia and ultimately leading Russian authorities to O.K. crocodile meat as a replacement for Western protein.

3. A crummy currency

The value of the rouble tumbled on Monday, reaching 64 roubles to the dollar for the first time on record. Russia’s central bank apparently attempted to halt the decline, Business Insider reported, but the $350 million move did little to bolster the rouble’s value.

4. Capital flight

As the situation inside Russia deteriorates, individuals have been yanking their money out of the country.

The Bank of Russia estimates capital outflows will hit $128 billion this year and $120 billion in 2015, the Telegraph reported.

In a December bid to stem the bleeding, Russian President Vladimir Putin announced tax amnesty for capital repatriated to Russia and a four-year freeze on corporate tax rates.

The fundamental woes of modern-day Russia are not unlike the problems that faced the Soviet Union in the 1980s.

Then, the price of oil fell from $66 per barrel in 1980 to $20 per barrel in 1986.

Now, the price of oil has fallen from $115 per barrel in June to around $60 per barrel now — and for every sustained $10 drop in the price of a barrel of oil, Russia’s GDP will take an estimated 1.5 percent hit.

Then, the Soviet Union faced protracted bloodshed and global condemnation for its 1979 invasion of — and subsequent decade-long war in — Afghanistan.

Now, much of the world has condemned Russia’s annexation of Crimea and suspected continued military involvement in eastern Ukraine.

Then, the situation became untenable and the Soviet Union broke apart.

Now … ?

The 1980s were rough on the USSR, and with the Russian government predicting a recession to hit early next year, it looks like the 2010s could be another rotten decade for Russia.

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