Is Russia on the verge of bankruptcy?

Is Russia on the verge of bankruptcy?

At the beginning of the 90s, there was one event that changed the entire history of the world. The mighty and undefeated USSR had collapsed… something unexpected for the entire world. It was known, that the Soviet Union had economic difficulties and pressure, but the majority Intelligent services (including CIA) thought that these economic difficulties will affect the USSR marginally and lead to changes… but not to complete collapse and dissolution.

With the end of the Soviet Union, the whole world changed. The Cold war ended, the USA became the only one superpower in the world, and there was no country in the world that was capable to challenge the supremacy and dominance of the USA. The Soviet Union disintegrated in several countries. The main one was Russia and its heritage, the Soviet Union. But Russia was still weak (losing a significant number of people and territory, which from then were separated countries). Together with insurgencies in some of the automatic republics, civil unrest, separation movements and civil wars (wars between some of the ex-Soviet republics and war of Russia with the local militia and Islamic fundamentalists in Dagestan and Chechnya) the economy was also fragile. In 1998, Russia received another hit with the Financial crisis, when the Russian government and the Central Bank were forced to devaluate the Russian ruble and defaulted on its debt. The West was anxious, that if Russia is on the verge of bankruptcy, the country may dissolve and many new countries will be born… everyone one of them with the access of nuclear and biological weapons of Russia. The country managed to survive. Because of the new president (Putin) and his new reforms; the rise of the prices of natural resources, Russia became a wealthier country, even for a short period was the 8th largest country in the world by GDP.

After the annexation of Crimea by Russia in 2014, Russia was hit by economic sanctions and with the fall of the price of the commodities (they form a significantly important role for the export of Russia) and the economy started to shrink. Six years later, Russia is in better condition, but the economy is in stagnation, and the fear remains. What will happen if there are new heavy sanctions and a new fall of the commodities- is Russia a stable country, or it is on the verge of bankruptcy?

-Debt to GDP

Debt to GDP is one of the best indicators that shows how much in debt is one country. The debt itself is not dangerous, but the ratio of GDP can make it risky for the economy of the country. The general rule is that a debt must reach no more than 60% of the GDP. A debt that exceeds 100% GDP is considered dangerous, which can lead the country to default.

So, how is the situation with Russia?

The current debt of Russia is one of the lowest in the world and much lower in comparison with Western countries. After the default on its debt in 1998, Russia strengthened its economy and decrease its debt. The highest debt in the last ten years was in 2014 (Crimea annexation) with 14.4%, but the debt decreased to 13.5% in 2017.

-Government budget

The Russian government manages its budget well, spending less than its economy produces.

The biggest financial deficit was in extreme times. The financial crisis in Russia in 1998 (-6.26%) and in 2009 (post effects of the Economic crisis) with 7.9%. After the Crimean event, in the next four years, Russia was in the permanent fiscal deficit, but in the last two years followed very strict fiscal discipline and the budget was again on surplus-2.7% in 2018 and 1.8% in 2019.

-Population and demographic trends

The Russian population is shrinking and despite the slight increase in 2014 (due to annexation of Crimea), the forecast is not good. The population will decrease between 10 and 20 million people by 2050[1], and the most pessimistic prognosis will be 83.7 million by 2100[2]. If the worst scenario happens, it will change the entire country. Russia, despite the fall of the USSR, is still the largest country in the world. Without enough population, Russia will have difficulties to support its current image of Great power and to hold its current territory. The dead rate exceeds the birth rate despite the effort of the Russian government with different social programs and has one of the lowest birth rates.

-Social Policy

Pensions and social benefits are one of the highest expenditures in a government budget. In Russia, the government pays most of the pensions for elderly people. In Russia, 27% of the budget goes for pensions and social benefits or more than ¼ of the budget[3]. The worst part is that the population is both decreasing and becoming older. With this fact, the expenditure on Social Policy will increase in the future. With a shrinking population, fewer people would contribute to the GDP and low productivity of the economy, it will be difficult for Russia to balance its budget without going to a permanent deficit in the next years. If Russia doesn’t increase the productivity of the economy and improve its business climate, there will be not enough money for all elderly people or their pensions will be low/mediocre.

-Households Debt To GDP

Even household debt is low. The main reasons are two- not so much relying on the debt in contrary with the countries of the West and the financial crisis in Russia in 1998, when the Russian ruble devaluated and their money depreciated. In recent years, private debt increased, reaching 18.10% of the GDP. It is very low to be a risk for the economy or for the business and there are no trends that this will be changed in the future.

-Government bonds

Government bonds are one of the indicators of how stable is one economy and how investors have trust in their economy. Here, we can easily spot three crises in the Russian market history. The crisis in 1998, when Russia declared a default on their debt- we can see that the interest rate was over 16% [4]. This indicates a very high risk. After this, the ruble recovered, and the interest rate decreased.

Another interesting point is 2008–2009. They represent the World economic crisis (2007–2008), the war of Russia with Georgia (2008) and the plummeting price of Urals heavy crude oil, which lost over 70% of its value. Interest rates had reached almost 16%, closed to 2001 when Russia was recovering from the crisis in 1998.

The last interesting point was 2014–2015 when Russian annexed Crimea. The USA, EU and their allies put heavy sanctions against the country. Another negative fact was the dropping of the prices of the oil and gas commodities that Russia relies heavily on to fill its government budget. The ruble was also under the attack of speculators- with the wise policy of the Central Bank of Russia; the ruble was stabilized and the interest rates dropped. Now, the interest rate is the lowest in the past twenty years -6.21% and the trend shows that it will continue to fall.

-Trade balance

The balance of trade shows how healthy is one economy and if there is a constant surplus, the country can take a higher debt.

Now, Russia is doing well, and it is in constant trade surplus. We can see very well how the higher oil prices affected their budget (2001–2006) and how their surplus is increasing. The fall of Urals heavy crude oil, which lost over 70% of its value, explained why in 2009 there was a drop in the surplus.

After the Crimean annexation, combined with western sanctions and fall of the price of the oil, affecting the profit that Russia usually makes.

In 2017, Russia increased the trade surplus because of the higher oil price and the reforms in its agricultural sector, Russia stopped importing agricultural products but to export them.

-Export

Russia often is accused that its economy is relying too much on its natural resources (mainly oil and gas). If we analyze the data, unfortunately, we confirm this. Russia is relying too much on its resources and if we neglect them, the export will drop significantly. The main part of the export-53% [5] is oil& gas, followed by other commodities and Iron&Steal. If we combined all resources, over 72% of the export are natural resources, which means that the economy is not capable to produce high-technology products. The good news from this graph is the rise of cereals, which means that the agriculture reforms are working, but the percentage is too small to rely on them.

Russia needs to diversify its economy or it will suffer when more of the natural resources are replaced (the boom of the electric cars, will be followed by electric trucks, ships…even planes).

-Government budget

How depending is the Russian budget on oil and gas? The answer is too much-nearly half of the budget is funded because of oil&gas revenues (46%) [6]) . If there is any further drop in the prices, the budget will suffer severely and the bad news for Russia is the trend-the mankind more and more is relying on the technologies which reduce the usage of natural resources. Russia has enough time to diversify its economy and rely more on its export on high-technological products… but if we see the last 15–20 years, we don’t see any big progress. In our modern world, any country that is relying mainly on its natural resources will suffer.

Conclusion

At the end of this article, can we answer the question “is Russia on the verge of bankruptcy”?

Affirmatively, and there are two answers- a short and a long one. The short answer is no, Russia is not on the verge of bankruptcy, quite opposite, it is financially stable with good fiscal policy. The long answer is no, but it can happen if Russia doesn’t make needed reforms and transformations- if the answer is not clear for you-continue to read. Technically speaking, the Russian debt is very low, only 13.5% of GDP. The main reasons are several factors- the growth of its economy (your ratio of debt-to GDP becomes better) and the strict fiscal policy (not large deficits with several exceptions in extreme times)-most of the time, their budget is very well balanced. But from where come the future risks?

They are several:

-the decline of the population (fewer workers and less future income)

-The population becomes older (more expenses for pensions and social benefits). Social Policy is the heaviest burden for the federal budget, and it will increase over time.

The export is extremely dependable on natural resources (mainly oil and gas) and the trend is negative. It is more likely in the future their price to decrease and their usage in the future will decrease mainly to technological innovations- electric cars, electric trucks, electric ships, and planes; the usage of sun-panels is more and more… diminishing the need of natural resources.

Therefore, not everything is black and white. For now, Russia is financially stable, but in the future, there are several challenges that must be handled or the country will be punished with increased expenses and decreased income… which will put the budget in an extremely difficult situation.

Source:

[1]https://www.populationpyramid.net/russian-federation/2050/ available 01/2020

[2]https://www.themoscowtimes.com/2019/06/18/un-predicts-russias-population-could-halve-2100-a66035 available 01/2020

[3]https://www.minfin.ru/en/statistics/fedbud/ document “Consolidated budget of the Russian Federation” available 01/2020

[4]https://tradingeconomics.com/russia/government-bond-yield available 01/2020

[5]United Nations COMTRADE available 01/2020

[6]https://www.minfin.ru/en/statistics/fedbud/ document “Consolidated budget of the Russian Federation” available 01/2020