The Economist on Russia's Economy

WESTERN measures against Russia—asset freezes and visa restrictions aimed at people and firms close to Vladimir Putin—may be pinpricks, but the crisis in Ukraine has already taken its toll on Russia’s economy and financial markets. Capital flight in the first three months of 2014 is thought to exceed $60 billion. The stockmarket is down by 20% since the start of the year and the rouble has dropped by 8% against the dollar. Worries about the devaluation feeding through to consumer prices have prompted the central bank to yank up interest rates, from 5.5% at the start of March to 7.5%. The IMF reckons the economy is in recession; this week it cut its growth forecast for 2014 from 1.3% to 0.2%.

Despite these upsets, Russia appears to hold strong economic as well as military cards. It provides 24% of the European Union’s gas and 30% of its oil. Its grip on Ukraine’s gas and oil consumption is tighter still. That makes it hard for the West to design sanctions that do not backfire.

Russia’s public finances are also much healthier than those of many of the countries against which it is pitted over Ukraine. The budget deficit was 1.3% of GDP last year, whereas it stood at 3.3% for the EU. Government debt amounted to a mere 13% of GDP, compared with 87% in the EU.

Among emerging economies, Russia appears to have stout defences to withstand external pressure. New estimates of GDP evaluated at purchasing-power parity exchange rates from the World Bank (see article) show that in 2011 it was the sixth-biggest economy in the world on this measure, only just behind Germany. Thanks to its huge energy exports, Russia’s current account is in surplus, forecast by the IMF to be 2.1% of GDP in 2014. In contrast countries like Turkey and South Africa, which took a battering earlier this year as investors worried about fragile emerging economies, are projected to run deficits of 6.3% and 5.4% respectively.

A long history of such surpluses has enabled Russia to amass impressive foreign-exchange reserves, which stood at $486 billion in March. According to the IMF these reserves are four times as high as its external-financing requirement—the rollover of external debt less the current-account balance—in 2014. Turkey’s reserves cover only half of its requirement.

Despite these strengths, however, the Russian economy is far from invulnerable. Not all the reserves are available for intervention, since $175 billion are earmarked in two wealth funds which cushion the budget and cover future pension spending. If capital flight continues at its current rate, the central bank will face a harsh choice: it can either expend its reserves to keep the rouble stable or allow the currency to drop, which will add to inflation and could precipitate a domestic banking crisis.

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