The financial crisis in Russia in 2014–2016 resulted from the drop in oil prices and, to a lesser extent, sanctions. It began with a devaluation of the Russian rouble in the second half of 2014, which led to high inflation at the end of the year. The Russian Central Bank adjusted its monetary policy and successfully stabilized the economic situation. As a result, Russian GDP contracted 3.7% in 2015.
The crisis stemmed from at least two major causes. The first was the fall in oil prices in 2014. Crude oil, a major Russian export, fell nearly 50% between its yearly high in June 2014 and 16 December 2014. The second is the result of international economic sanctions imposed on Russia following Russia's annexation of Crimea, the war in Donbas and the broader Russo-Ukrainian War.
Capital outflows of $154B and balance-of-payments shocks put additional pressure on the currency, which led to a rise in inflation at the end of the year. In response, the Central Bank accelerated the move to a floating exchange rate, sharply increased interest rates from 8% in August to 17% in December and spent $107.5B of Russian foreign reserves in 2014 alone to stabilize the economy, which was ultimately successful.
The crisis affected the Russian economy, consumers and companies, regional financial markets, and Putin's ambition for the Eurasian Economic Union. The Russian stock market fell sharply, with the RTS Index dropping 30% from the beginning of December through 16 December 2014.
During the financial crisis, the economy shifted toward state ownership, with 60% of productive assets in the hands of the government. By 2016, the Russian economy rebounded with 0.3% GDP growth and officially exited the recession. In January 2017, Russia had foreign currency reserves of around $391 billion, an inflation rate of 5.0% and interest rate of 10.0%.
Following the 2022 Russian invasion of Ukraine, the country faced another financial crisis.
Causes + Timeline of the Russian rouble exchange rate Event Date RUB per USD Start of Euromaidan 21 November 2013 32.9975 Annexation of Crimea 18 March 2014 36.2477 Minsk Protocol 5 September 2014 37.0028 Donbas general elections 2 November 2014 43.0072 Central Bank intervention 16 December 2014 68.4910 Minsk II 11 February 2015 66.0305
Economic sanctions
The United States, the European Union and many other countries had imposed economic sanctions on Russia following the start of the Russo-Ukrainian War in 2014, including Russia's annexation of Crimea and the War in Donbass. Despite the financial crisis, international aid to Russia was not considered likely.
Economic sanctions contributed to the decline of the rouble since some Russian oil companies have been prevented from rolling over debt, forcing them to exchange their roubles for U.S. dollars or other foreign currencies on the open market to meet their interest payment obligations on their existing debt.
The impact of the international sanctions on Russian economy has been limited by design, since the sanctions only affected a limited number of individuals and companies. Russian counter-sanctions however reduced imports of food into Russia, which led to rising inflation and an increase in food prices. As result, the average salary decreased and the number of people living under the poverty line increased.
Fall in oil prices
The Russian economy depends largely on crude oil exports. In February 2014 crude oil prices started to slide down due to the boom in American shale oil production. For every $1 decline in crude oil prices, the Russian economy loses billions of dollars. The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in December 2014. The drop in the oil prices was caused by a drop in the demand for oil across the world, as well as increased oil production in the United States. This fall in oil prices hit Russia hard, as roughly half of the Russian Federation's governmental revenue comes from the sale of oil and gas. Russia's economy suffers from Dutch disease, a term economists use to describe a situation in which a country focuses on developing its natural resources to the detriment of other economic activity. In 2014, Russia needed an oil price of $100 per barrel to have a balanced budget. As the price of oil falls, Russia continues to sell its oil at operational capacity, without the ability to dramatically increase oil production to compensate for the lower price, and thus due to the reduced profit from selling oil, the government has substantially lower income. Russia is not alone in feeling the ill effects of falling oil prices, as several other countries, including Venezuela, Nigeria, and Kazakhstan, also faced reduced revenues and economic activity.
In August 2015, oil prices fell to US$37 per barrel and then bounced to more than US$45 on 28 August. Now as OPEC has reduced production from November 2016 oil prices have started to move up and so does the rouble.
Other possible causes Russian President Vladimir Putin has been accused by critics of running a kleptocracy, in which a small number of rent-seeking plutocrats drain the economy. Russia was ranked second in the world on The Economists 2014 crony-capitalism index and first in their 2016 rankings. Putin accused the Western nations of engineering the Russian economic crisis. He has also said, "Our (Western) partners have not stopped. They decided that they are winners, they are an empire now and the rest are vassals and they have to be driven into a corner."
Russia was already near a recession before its annexation of Crimea, and Russia ranks low on the World Economic Forum's rankings of road quality, technological adaptation, and burden of government regulation. Russia's already-weak economy left it less able to withstand the challenges imposed by low oil prices and international sanctions. The Russian Central Bank's "erratic response" to the falling rouble has also been blamed for deepening the crisis.
Russian monetary policy Decline in the Russian rouble Since the Great Recession, yields on U.S. treasuries and other low-risk assets have decreased due primarily to the liquidity-trap and also unconventional stimulative measures by central banks, such as ZIRP and quantitative easing. This has led investor patterns to become what is known as "reach for yield" with emerging market debt: emerging market debt is being bought by developed economy investors due to investors seeking greater interest on their holdings of debt. This led to increased issuance of debt by Russian companies in foreign currency-denominated terms, with $502 billion in foreign-currency denominated debt as of June 2014, up from $325 billion at the end of 2007.
The recent decline in the rouble has increased the costs for Russian companies to make interest payments on debt issued in U.S. dollar or other foreign currencies that have strengthened against the rouble; thus it costs Russian companies more of their rouble-denominated revenue to repay their debt holders in dollars or other foreign currencies. As of March 2016, the rouble was devalued more than 50 percent since July 2014.
+ Official exchange rates RUB/USD and RUB/EUR set by the Bank of Russia United Statesdollar Euro
Central Bank intervention On 15 December 2014, Russia had foreign currency reserves worth around $400 billion, the sixth-highest total in the world, giving Russia the ability to prop up the rouble. On 15 December, the Central Bank of Russia spent almost $2 billion in an attempt to strengthen the declining rouble.
Just before 1 a.m. local time on 16 December 2014, the Central Bank increased its key interest rate from 10.5% to 17% in an attempt to slow or stop the decline of the rouble. It was the sixth increase in interest rates by the Central Bank during 2014.
Despite the Central Bank's intervention, the rouble declined further, to as low as 79 roubles to one U.S. dollar, compared to 33 roubles to the dollar in January 2014. The rouble strengthened from its lows on 16 December after the Central Bank said it would not implement capital controls.
On 22 December, the Central Bank lent $530 million to Trust Bank, which became the first bank to accept a government bailout during the crisis.
On 12 January 2015, the Central Bank's 2014 data of net currency interventions was reported by Interfax, a Russian news agency, to have been $76.13 billion and , including $11.9 billion in December 2014.
In 2015, the Central Bank decreased interest rates numerous times. On 30 January, the Bank cut the interest rate from 17% to 15%. On 13 March, it was lowered to 14%, and 12.5% on 30 April. Inflation had slowed to 16.5% by 26 April, down from approximately 17% in March. On 15 June, the interest rate was lowered to 11.5%, and 11% on 31 July. Inflation as of 27 July was 15.8%, an increase from 15.3% in June, as a result of a temporary tariff increase, said the Bank.
State-owned agency TASS reported a loss of US$5.4 billion in the Bank's foreign reserves to US$369.2 billion on the week of 23–30 October."Russia's international reserves fell by $5.4 bln over one week." TASS. 5 November 2015.McHugh, Jess (5 November 2015). "Russian Economic Crisis 2015: International Reserves Slump $5.4B Amid Sanctions, Ongoing Recession". International Business Times.
In January 2017, Russia had foreign currency reserves of around $391 billion, an inflation rate of 5.0% and interest rate of 10.0%.
Financial, economic, and social impact Impact on Russia On 16 December 2014, the RTS Index, denominated in U.S. dollars, declined 12%, the most on any given day since the 2008 financial crisis in November 2008, and the MICEX Index declined 8.1% at one point before ending the day higher. This increased the decline of RTS Index, up until 16 December, of nearly 30% during the month of December. In response to rising interest rates and bank runs, the interest rate on Russian three-month interbank loans rose to 28.3%, higher than at any point in the Great Recession of 2008.
To get rid of the Russian roubles which were declining in value, many Russians chose to purchase durable goods, such as washing machines, televisions, furniture, and jewelry, and to convert their pensions and savings from roubles to US dollars and Euros. Several currency changers offered cash only at much greater exchange rates: USD up to 99.8 RUB (official rate was 61.15) and EUR up to 120–150 RUB (official rate was 76.15).
Some foreign companies halted their business activities in Russia, including Volvo car dealerships and the online stores of Apple and Steam, due to the high volatility and decline of the Russian rouble. Additionally, IKEA temporarily suspended sales of certain goods in Russia, in part due to the volatility and in part due to a lack of adequate supply, as numerous Russians bought IKEA furniture.
Many Western financial institutions, including Goldman Sachs, started cutting the flow of cash to Russian companies since they had restricted some longer-term rouble-denominated repurchase agreements (repos). These actions were intended to protect Western firms from the high volatility of the rouble. Repos had allowed Russian companies to exchange securities for cash with Western financial institutions, so the restrictions added pressure to the Russian financial system.
Russia may also be excluded from the MSCI Emerging Markets Index, composed of 26 countries' indices, if capital controls or currency controls are implemented by Russia, since such measures would make it more difficult for foreign entities to access Russian securities markets. Russia would be reclassified as a standalone market in that event.