1.0. Introduction
Russia is rated among some of the most developed and fastest growing economies of the world. The country is enriched with natural resources of which oil and gas are the most worth mentioning (Alexeevand Weber, 2013). This paper sets out to investigate into the growth of Russian economy. Initial section aims to briefly overview the current trends relating to GDP growth, which is followed by the identification of chief characteristic of economy (i.e. overheating or unemployment). In a later part, the impact of economic downturn encountered a few years ago on the Russian economy and the government’s initiatives to mitigate the issues being faced will be assessed. In the end, practical recommendations are given basing on the insight gained from the core findings.
2.0. Russia GDP Trend
Past history of economic data covering 20 years i.e. from 1995 to 2015 provides the evidence of average 3.23% growth of Russian GDP (Trading Economics, 2016). Hence, it is even sliding beneath its average level of growth, which denotes a critical downturn as also shown in the figure blow:
Figure 1 - Down Trend of Russiasn GDP
(Trading Economics, 2016)
And extrapolation of current trends to the coming years serves as a base for forecasting negative change in the GDP in future.
3.0. Factors Contributing to Current Economic Decline
So now it is clear that the Russian economy is undergoing a downturn. Now the question arises what are the root causes behind this downfall. Some of the most potential factors contributing to this situation are as follows:
3.1. Declining Oil and Gas Prices
Price of fossil fuels especially that of crude oil is at persistent decline over the past couple of years. Oil has plunged down to $35 per barrel in the international market, which means more than 100% shrink in price as compared to its level two years ago. As a matter of fact, Russia is one of the economies that are highly dependent on fossil fuels. Almost half the Russian budget is made up of oil and gas exports. Therefore, fluctuations in the prices of natural resources in international market have always been impactful for the Russian economy. And, these factors are also at the bottom of its current downfall. Even, the President Vladimir Putin is of the view that the world economy may crash if the oil price fellow below a critical limit. Majority of analysts are also not optimistic about the future of Russian economy as the dropping oil and gas prices seem to leave long lasting impact on it.
3.2. EU-US Sanctions
But oil prices can alone not be blamed for the current situation. Coexistence of some other critical factors along with it intensifies the economic downturn in Russia. And one of these factors is sanctions imposed on Russia by the Super Power on being found indulged into supporting separatists in Ukraine. Closure of firms, ban on travels, asset freeze, and many other sanctions applied to high percentage of individuals and investor groups have halted or slowed downmany economic activities in the region (BBC News, 2014). It combined with some other issues is playing critical role in current dramatic reduction of GDP growth rate in the underlying country.
3.3. Depreciation of Rubble
Another factor deepening the economic downfall of Russia is the falling value of Rubble. Last year (in 2015), it has hit its lowest since 1998. It reached a level of 102.6 rubbles to one dollar, which is alarming. Russian depends a lot on import of consumer goods (Worstall, 2016). Low value of currency means that these goods will cost more than before. The chart given below further illustrates the scenario:
Figure 2 - Decline of Rubble
(BBC, 2014b)
3.4. After-Effects of the Recession on Russian Economy
A big economic downturn termed as ‘the recession’ that took place in 2007 shook the base of the world’s economy. Majority of small and big countries underwent critical changes in their economic patterns. It caused the business closures, low demand for labour, lower level of wages, weakening purchasing power of buyers, falling prices, unemployment, etc. Russia is one of the countriesstill faced by its after-effects. It also suffered negative economic outlook as a result of recession (Lewis, 2014). For example, in 2009, poverty rose by 14% and employment declined to 7.9% (which was previously going an uptrend and was recorded to be above 8% in 2007). Further details are depicted in Figure-3 that clearly shows how different economic indicators took a negative shape as the Russian economy entered 2009:
Figure 3 - Impact of Recession on Russian Economy
(Bogetic, 2010)
Even though the Russian economy showed some signs of recovery, it never came back strongly, and is now at its worst since recession (Lewis, 2014).
4. Current Direction of Russian Economy
Russian economy is in real trouble despite the fact that the data shows a downtrend in Russian unemployment rate as also provided in the figure below:
Figure 4 - Unemployment Rate in Russia
(Trading Economics, 2016b)
Unemployment rate in Russia is consolidating between 4% and 5% while indicating a downtrend in the long run (as shown in Figure 2). Apparently, it shows that everything is right.
However, it should also be taken into account that employment structure and employee behaviour in Russia is totally different from that in other countries. Since the inflation is on consistent rise in the wake of rubble declining against dollar and drop in oil prices, it is creating a suffocating environment for businesses. Aggregate demand for goods is declining. Even though the labor is still in demand in some sectors that has no or very little concern with crude oil or energy sector, majority of Russian industries is dependent on oil. So how can unemployment rate be on decline?
The answer lies in the fact that Russia is faced by hidden unemployment, which is not considered while releasing any type of data. In Russia, it is not trendy to fire employees as a result of firm downsizing. Rather, they are forced to work on reduced salaries and extended working hours. Employees also not resist or switch in quest for better opportunities, as they are fully aware of the level of demand in the labour industry at any given time. Currently, this issue is identified in Russia (Dokuchaev, 2016).
Furthermore, inflation is rising due to declining oil prices and weakening rubble. This is adding to the already declining buying power of consumers (The World Bank, 2015). All these factors are discouraging for business. If the problem exists, it can lead to closure of businesses on mass scale. Hence, ultimately it is safe to state that the Russian economy is slowing down despite the fact that some of the analysts consider it overheating keeping in view superficial data (such as declining rate of unemployment).
5.0. Response of Concerned Authorities to the Situation
The government is proposed to levy profit-based tax on the oil producing companies or on those ones that are massively affected by decline in oil prices. However, the government has so far been refusing to take this initiative fearing that it would increase the budget deficit. Ironically, nonetheless, the government has decided to provide subsidy to all the aforementioned types of companies. It will provide them aid through National Welfare Fund. This will, somehow or to good extent, will help to offset the impact of loss they are suffering in the wake of reduction in oil prices (Grushevenko, 2015).
Apart from this, Putin has resolved to increase the government’s spending on defence enterprises. According to the president, it will be like “killing two birds with one stone”. On one hand, it will add to the defence of country on the whole. On the other, it will provide support to the failing economy, as it largely depends on manufacturing of weapons and other warfare considerations (Meyer, Biryukov,Pismennaya and Arkhipov, 2015).
Apart from these, there are no major solutions being provided on political level. The government ensures minimum interference with the market-related matters. There is no comprehensive reformative plan. Hence, it is supporting neoclassical school of thought in economics by not relying on the idea of Keynesian’s view on government’s intervention (Wolff, Resnick, and Wolff, 2012).
6.0. Conclusion and Recommendations
This paper aims to explore the growth of Russian economy. The first section, in this regard, presents the overview of the current trends relating to GDP growth. This is followed by presenting the chief characteristic of economy. Also, the paper explores and studies the impact of economic downturn encountered a few years ago on the Russian economy and the government’s initiatives to mitigate the issues being faced. Finally, the paper presents practical recommendations on the basis of the insights generated from the analysis and core findings.
Russian economy is faced by downturn after being hit by many impactful factors such as declining oil prices, international sanctions, falling rubble, increasing ‘hidden’ unemployment, inflation, etc. The question that arises is whether or not it is good on the part of government not to intervene to provide the solution.
The researcher, on the basis of the insight gained from the study, concludes that Russian economy is now shifting to the right track. Therefore, it is not even wise on the part of government to provide aid to the industrial sectors affected by oil-price slump. Russia has always been over-relying on oil export, which is no more a good strategy. The world is moving towards energy efficient solutions. Then, the fear of nearing “oil peak” cannot be ignored either. Therefore, it is good if Russia shifts its dependency from oil and gas production industry to other sectors.
Falling rubble value has short term negative impact, but it will prove to be helpful in the long run. Making the imports expensive, it will encourage domestic production promising attractive returns on exports. As a result of it, the economy will take a whole new turn. It will be in a more certain and better direction. Therefore, it is better to wait for long term solutions rather than supporting oil and gas industry with so much uncertainty involved.
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