What Caused the Russian Financial Crisis of 2014 and 2015

A Look at the Causes of Russia's Economic Turmoil

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Russia’s most recent bout of economic turmoil began in mid-2014 with the rapid collapse of its currency – the ruble – in the global foreign exchange market. With the currency in a tailspin, Russian companies found it increasingly difficult to repay foreign denominated debts – such as U.S. dollar denominated debt. These dynamics took an early toll on the country’s economy, which was further hit in 2015 with sharply lower crude oil prices, although its recovering in mid-2016.

In this article, we’ll take a look at the underlying causes behind the Russian financial crisis and the prognosis for international investors.

Setting the Stage

The U.S. Federal Reserve’s low interest rates had a profound impact on emerging markets following the Great Recession. As investors sought out higher yields, capital flowed outside of the U.S. and developed countries and into frontier and emerging markets. Companies eager to take advantage of these dynamics quickly accumulated U.S. dollar denominated debt – including Russia’s debt that increased from $325 to $502 billion between 2007 and mid.

With the interest rates on the rise in the U.S., investors have become re-interested in the U.S. markets and capital began to flow out of emerging markets. The capital outflow has caused an economic slowdown, which has devalued many emerging market currencies like the ruble. Of course, these dynamics have made it increasingly difficult for foreign companies to repay dollar denominated debt, which has further exacerbated the slowdown.

Falling Oil Prices

Russia’s economy is heavily dependent on crude oil and natural gas, especially when it comes to state-owned giants like Gazprom. Between mid-2014 and mid-2015, crude oil prices have fallen from a high of around $100 per barrel to below $50 per barrel, cutting deep into the country’s major source of revenue.

Investors have responded by selling oil equities, while there are broader concerns of the government’s ability to weather the storm.

The increased production of shale-based oil and gas in the U.S. could keep pressure on prices over the long-term in the $75 to $80 per barrel range, while the Middle East has kept production at a high to try and encourage shale operations to shut down. These dynamics will likely keep oil prices depressed for some time to come, while the odds of reaching above $100 per barrel remain distant for at least the next couple of decades.

Economic Sanctions

Russia’s decision to invade Ukraine in mid-2014 resulted in a series of economic sanctions on the country by the U.S. and its allies. According to Russian Prime Minister Dmitry Medvedev, Western sanctions had cost the country $26.7 billion in 2014 and those costs could increase to $80 billion in 2015. The value of the country’s foreign trade slumped approximately 30% during the first two months of 2015 alone, suggesting that things may get worse before improving.

Economic sanctions have also had a direct impact on the ruble’s devaluation, since Russian companies preventing from rolling over debt have been forced to exchange rubles for U.S. dollars or other currencies to meet their interest payment obligations on existing debt.

Many Russian individuals have even resorted to purchasing durable goods in order to reduce their exposure to the currency risk – something that’s harder to do with economic sanctions.

Key Takeaway Points

  • The Russian financial crisis has been driven by a number of factors, including falling crude oil prices, rising U.S. interest rates, and economic sanctions.
  • These factors have resulted in a steep drop in the country’s GDP, rising inflation, and a sharply lower currency valuation that has spiraled out of control.
  • Many of these factors are unlikely to reverse in the near-term, although the economic sanctions could be released if the political environment changes.