Russia puts losses from sanctions, cheaper oil at up to $140b a year

MOSCOW — Lower oil prices and Western financial sanctions imposed over the Ukraine crisis will cost Russia around $130-140 billion a year — equivalent to around 7 per cent of its economy — Finance Minister Anton Siluanov said on Monday.

His comments are the latest acknowledgement by Russian policy makers that sanctions restricting borrowing abroad by major Russian companies are imposing heavy economic costs. But in Siluanov’s view, the fall in oil prices is the bigger worry.

“We’re losing around $40 billion a year because of geopolitical sanctions, and about $90 billion to $100 billion from oil prices falling by 30 per cent,” he told a news conference.

“The main issue that affects the budget and economy and financial system, this is the price of oil and the fall in monetary flows from the sale of energy resources,” the minister added.

Official forecasts suggest Russia’s gross domestic product is likely to be around $1.9-2 trillion this year, at average exchange rates.

Siluanov’s estimate of the cost of lower oil prices is in line with analysts’ rule of thumb that each $1 fall in the oil price lops around $3 billion off export earnings. The oil price has slumped from nearly $115 per barrel in June to around $80 now.

Oil and gas account for around two-thirds of Russia’s exports, making the balance of payments highly vulnerable to oil price falls.

Natalia Orlova, chief economist at Alfa Bank, said the $90-100 billion estimate did not take into account the effect of the weakness of the ruble, partly caused by the fall in the oil price, which would help to compensate the loss by boosting exports and curtailing imports.

The ruble has lost 25 per cent of its value against the dollar since June, and Orlova indicated that the net impact of lower oil prices on the economy would be around $40 billion.

But when it comes to the cost of sanctions, Siluanov’s estimate of $40 billion may be conservative, based on the direct cost to companies unable to borrow abroad rather than the overall impact on investor behaviour.

Other analysts have arrived at gloomier estimates, taking into account the indirect cost of sanctions and overall East-West tensions linked to Ukraine.

In its latest monetary strategy, the central bank forecast that net capital outflow this year would be $128 billion, more than double the $61 billion seen in 2013, as a result of “the events in Ukraine and the introduction of sanctions”.

Last week, influential former finance minister Alexei Kudrin said the impact of “formal and informal” sanctions on the ruble — and by implication the wider economy — was comparable to the impact of lower oil prices, and that foreign investor confidence would take 7 to 10 years to recover. 

Separately, President Vladimir Putin has allowed the central bank to administer strong medicine, sharply raising interest rates even as it freed the ruble to float.

Such tough measures may well help push the country deeper into recession next year, but have so far staved off financial panic, runaway inflation or a currency meltdown like the one that helped catapult Putin into power in the 1990s.

Those who follow the central bank say the hawkish moves are a result of Putin, known for closely managing Russia’s machinery of power, giving the bank’s technocrats free rein.

“There is ongoing criticism of the central bank and of the whole government being Putin’s lap dog,” said a high-ranked government source. “But all things considered, the central bank is now much more autonomous than it is broadly perceived.”

The high interest rates will hurt. The European Bank for Reconstruction and Development says recession is certain, predicting 0.2 per cent contraction for the full year of 2015.

Politicians have grumbled. Economy Minister Alexei Ulyukayev sent a letter to the Kremlin in the summer urging greater “cooperation” between the bank and the government, viewed as a plea for looser policy.

“There is a tension between the government and the central bank as regards growth. The effect of these stabilisation policies is going to be to deepen the recession,” said Christopher Granville, managing director of London-based consultancy Trusted Sources.

Putin himself has complained about high borrowing costs. But so far, he seems to trust the hawkish instincts at the bank.

“What the central bank is doing is in line with what the leadership wants, in a strategic way,” said Granville. “Stability is the absolute top priority, rather than avoiding negative growth at all costs.”

Still, there is always a chance that Putin can change his approach. Remarks he made on Tuesday hinted as much. Speaking to Siluanov, he called for “teamwork between the central bank and the government”.

Obsession 

Exchange rates are an obsession for Russians since the 1990s, when hyperinflation after the fall of the Soviet Union wiped out the financial system, destroyed savings and brought the economy to its knees.

A second currency collapse and default in 1998 propelled Putin into power the following year, and a stable ruble has been one of the most prized achievements of his rule ever since.

Putin himself makes much of the central bank’s independence.

“We — from the executive power level — do not meddle in the policy of the central bank,” he said this month when meeting International Monetary Fund (IMF) head Christine Lagarde. “The central bank, in accordance with the law, conducts an independent policy. But of course we look carefully at what is happening.”

In an e-mailed comment, the bank said its independence, “one of the fundamental principles in understanding of monetary policy”, was enshrined in the constitution.

Some of Putin’s critics say he keeps out of monetary policy because he feels insecure about an area outside his expertise.

“The central bank of Russia is the most independent institution in modern Russia,” said Sergei Aleksashenko, a former deputy central bank governor and critic of the president.

“That originates from Mr Putin’s inability to understand how monetary authorities operate. He understands the importance and influence of the central bank but is afraid to influence it in a strong manner,” he added.

Geeks in glasses 

Unlike at some ministries and top companies, the bank’s management does not include any of Putin’s powerful old friends.

“It’s just a bunch of glasses-wearing geeks; you can argue more or less competent, but geeks,” said the high-ranked government source.

Putin has put his trust in the bank’s governor Elvira Nabiullina, 51, at the bank’s helm for 17 months after serving Putin for years as economic adviser and Cabinet minister.

“She has turned out to be stronger than expected as the central bank governor,” said Anders Aslund, senior fellow at the Peterson Institute for International Economics in Washington.

Nabiullina, in turn, has put monetary policy in the hands of Ksenia Yudayeva, a US trained economist regarded as one of the brightest in the country.

The ruble stability of the Putin years has been underwritten by vast currency reserves earned from selling oil and gas. But when oil prices fell and sanctions were imposed over the Ukraine crisis this year, even Russia’s $420 billion war chest showed its limits.

After spending $30 billion supporting the currency in a single month, Nabiullina brought forward long-awaited plans to float the ruble, abandoning efforts to keep the exchange rate within an official band.

On the morning of November 10, when it was announced, even the heads of the bank’s departments were taken by surprise, sources said, emphasising Nabiullina’s ability to prevent leaks.

Before she cut the ruble loose, Nabiullina sharply hiked interest rates to ensure that savers would hold rubles and prevent a panicked flight, like the one that hit in 1998.

The ruble is still some 29 per cent down against the dollar, but has rallied in recent days. Earlier this week, Nabiullina stoically defended the decision to float the currency.

“It is absolutely impossible to control the exchange rate... in the current economic conditions that the Russian economy is now in, by keeping its dependency on the price of oil,” she told lawmakers in parliament.