Russia’s Great Depression

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Russia’s Great Depression PLUNGING OIL PRICES are pushing Russia’s economy past the point of no return

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Russia is in deep trouble.

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So deep, in fact, that it could be headed for an economic depression.

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The source of its problems can be traced to the price of oil.

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Since the middle of last year, oil prices have dropped by a staggering 54%.

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This trend follows OPEC’s attempt to bankrupt new, but more expensive, sources of oil in the U.S. and elsewhere.

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But Russia has been hurt more than most because a huge portion of its economy relies on energy exports.

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In 2013, for instance, Russian exports totaled $526 billion.

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$305 billion of which related to oil and other types of fuel.

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For Russia to avoid economic contraction, oil must stay above $90 a barrel.

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Thus, not surprisingly, the plunge in prices is having a brutal impact on Russia’s economy.

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Most critically, the value of its currency, the Ruble, has tumbled.

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At the beginning of 2014, 34 rubles bought one U.S. dollar.

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Today it takes 58 rubles!

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As a result, import prices have effectively doubled.

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And if Russia can’t import products at reasonable prices, then its standard of living will drop precipitously.

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One commentator is even predicting that Russia’s GDP could fall by as much as 10% this year!

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By comparison, U.S. GDP fell only 2.8% in the worst year of the financial crisis.

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But perhaps most troublesome is the impact on Russia’s banks.

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To slow the sale of rubles, Russia’s Central Bank hiked its benchmark interest rate from 10% all the way up to 17%.

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The move, which inversely impacts bond prices and bank profitability, triggered the failure of Trust Bank, a mid-sized lender based in Moscow.

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This may not seem like a big deal, but we’ve learned over the years that one bank failure often begets others.

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As Walter Bagehot wrote in his seminal treatise on banking: "In wild periods of alarm, one failure makes many.”

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The question, in turn, is whether or not Russia can maneuver around these pitfalls.

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If it can, then it may be able to avoid a deep depression.

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But if it can’t, then we may soon be witness to the first Great Depression of the 21st century.

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