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Russia’s Great Depression PLUNGING OIL PRICES are pushing Russia’s economy past the point of no return
Russia is in deep trouble.
So deep, in fact, that it could be headed for an economic depression.
The source of its problems can be traced to the price of oil.
Since the middle of last year, oil prices have dropped by a staggering 54%.
This trend follows OPEC’s attempt to bankrupt new, but more expensive, sources of oil in the U.S. and elsewhere.
But Russia has been hurt more than most because a huge portion of its economy relies on energy exports.
In 2013, for instance, Russian exports totaled $526 billion.
$305 billion of which related to oil and other types of fuel.
For Russia to avoid economic contraction, oil must stay above $90 a barrel.
Thus, not surprisingly, the plunge in prices is having a brutal impact on Russia’s economy.
Most critically, the value of its currency, the Ruble, has tumbled.
At the beginning of 2014, 34 rubles bought one U.S. dollar.
Today it takes 58 rubles!
As a result, import prices have effectively doubled.
And if Russia can’t import products at reasonable prices, then its standard of living will drop precipitously.
One commentator is even predicting that Russia’s GDP could fall by as much as 10% this year!
By comparison, U.S. GDP fell only 2.8% in the worst year of the financial crisis.
But perhaps most troublesome is the impact on Russia’s banks.
To slow the sale of rubles, Russia’s Central Bank hiked its benchmark interest rate from 10% all the way up to 17%.
The move, which inversely impacts bond prices and bank profitability, triggered the failure of Trust Bank, a mid-sized lender based in Moscow.
This may not seem like a big deal, but we’ve learned over the years that one bank failure often begets others.
As Walter Bagehot wrote in his seminal treatise on banking: "In wild periods of alarm, one failure makes many.”
The question, in turn, is whether or not Russia can maneuver around these pitfalls.
If it can, then it may be able to avoid a deep depression.
But if it can’t, then we may soon be witness to the first Great Depression of the 21st century.