Russia: Will history repeat itself?

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With memories of a similar Russian crisis in 1998, some fear the current Russian crisis will follow the same trajectory of 1998 when Russia was forced to default on its debt. Over a 6-month period in 1998, the Russian ruble lost more than 70% of its value; crude oil prices fell below $18; inflation in Russian skyrocketed; banks and enterprises across the country collapsed; Russians were left jobless; and the "Moscow meltdown" infected emerging markets around the globe.

For the Russian crisis to date: The ruble plunged to an all-time low against the dollar last Tuesday with its steepest intraday fall since the Russian crisis in 1998. Last week’s plunge took the ruble’s losses for the year to more than 50%. At the same time, Brent crude oil has dropped 48% since June to $60 a barrel, squeezing exporters like Russia which relies on crude oil exports for much of its foreign currency earnings. Oil and oil-related products make up more than half of Russia's exports.

Russia’s main economic problems:

•           With the ruble losing half its value, food inflation shot up to 13% in November.

•           Russia's economy has been slowing down since 2012 and is on the verge of recession. The Russian central bank said the economy will contract as much as 4.7% next year if oil remains at $60.

•           Capital flows out of Russia could reach $128bn this year, the central bank estimates. The commodity-centered economy now faces massive financial flight and a lack of meaningful foreign investment.

•           Some leading banks, hit by sanctions, are unable to raise mid- to long-term financing outside Russia. The first bank failed on Monday. Sanctions have cut off Russia's access to foreign capital at the same time that falling oil prices make that access even more essential. Sanctions along with the global capital markets are putting Russia on its knees.

•           Banks and companies have significant foreign debt - at least $200bn. About $100bn of that debt will have to be repaid in 2015, and Russia's export receipts have declined by $140bn.


Significant differences with 1998:

•           Russia is looking at a $200 billion trade surplus for 2014. At least, they are starting with a healthy balance sheet on the surface.

•           Russia is also running a federal budget surplus of 2%. In 1998, it was an 8% deficit.

•           Russia also has more than $400 billion in foreign reserves, which far exceeds the $16 billion Russia had saved ahead of the 1998 default. With the world's sixth-largest foreign currency reserves, this could insulate it from a lot of financial hardship.

•           Many Russian manufacturers have benefited from a bigger domestic market because of the Kremlin's own sanctions on Western imports. There are also signs that Russia's long-stagnant agricultural and manufacturing sectors are beginning to pick up to replace some imports that have been priced or sanctioned out of the Russian market.

•           While interest rates have risen to their highest level in 9 years, they remain a fraction of the levels seen in 1998. Russia raised its benchmark rate 6.5 percentage points to 17% on December 15. Short-term rates soared to over 100% back in 1998.


Still, many Russian commentators see a perfect storm and fear a return to financial meltdown of 1998. Russian President Vladimir Putin could help pull the Russians out of this crisis if he would work with the Ukrainian government to end the conflict there so U.S. and European sanctions are lifted. Few believe that will happen.

Polls suggest Putin's popularity remains at all-time highs of over 80%. Putin's popularity has soared in recent months with his annexation of Crimea, his move into eastern Ukraine, and all of his talk about restoring Russian greatness. Blaming Russia's woes on the outside world has worked well for him politically. So far, he has repeatedly chosen to raise the stakes on Ukraine. And the Russians generally appear to agree with Putin's actions. With the Kremlin showing no signs of backing down in its confrontation with the West, Russia's only other hope would be a quick upturn in oil prices, according to one economic official. A strong price rebound from the 1998 crude oil lows helped Russian recover from its previous financial crisis.

Impact on agriculture and exports

The declining ruble boosts the country's exports by making Russian exports cheaper for foreign buyers. Russia’s only competitive export industries are arms, oil and grains. The USDA's latest supply and demand report has projected Russia's exports to total 22 million tons, which is 13.9% of the total global grain trade estimated for 2014/15 of 158.04 million tons. This week, Russia announced plans to impose a heavy tax on grain exports since ruble volatility have caused exports to spike. Other world exporters are stepping in to capture the Russian business. Traders pointed to record world wheat production for the reason the wheat market rally may be stalling.

The Russian farmer faces a dilemma. Increasing wheat prices are an incentive to export more, although this opportunity has been curtailed with the government's recent actions. Even if exports were allowed to proceed, producers then face the uncertainty of holding a rapidly deteriorating Russian currency.

The Russian crisis in 1998 does not give us a good blueprint for what may happen tomorrow to Russian agriculture and exports. In October of 1998, Russia suffered from a poor harvest and had to appeal for international humanitarian aid, including food. Agriculture in Russia in 1998 was still in transition as it struggled to transform from a command economy to a market-oriented system. Following the breakup of the Soviet Union in 1991, large collective and state farms – the backbone of Soviet agriculture – had to contend with the sudden loss of state-guaranteed marketing and supply channels and a changing legal environment that created pressure for reorganization and restructuring. In less than ten years, livestock inventories declined by half, pulling down demand for feed grains, and the area planted to grains dropped by 25%. After nearly ten years of decline, Russian agriculture finally began to show signs of modest improvement after 2000.

There are too many differences with Russian crisis in 1998 to draw any solid conclusions on how the current Russian crisis will impact grain markets. Too many unknowns, yet. Putin may try to surprise everyone with some dramatic attempts which could make the crisis even worse. Or crude oil could rebound to bail out the Russians and ruble, like it did after 1998. We’ll keep you posted as the situation unfolds. 

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