The Great Recession 0f 2008 - Russia

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On the currency front, the pressure on rouble can be mainly attributed to the fall in oil prices. The central bank purchased rubles from the foreign exchange market using foreign reserves. But it neglected to address the most important factor, the number of ruble in circulation. The supply of rubles remained largely unchanged. If the demand for rubles declines, and supply is unchanged, then a lower ruble value is the inevitable result. Indeed, once market participants notice that the central bank is not properly managing the supply of rubles, it is common for demand to fall even more. This was the case with CBR as it could not manage the free fall of the ruble.

However, the structure and implementation of the policy response could have been more effective. First, the package’s tax cuts and the breadth of its measures, including broad pension and wage increases, made it more expensive than it otherwise would have been. In addition, its relative lack of focus on infrastructure and targeted social assistance kept the overall output multipliers low. And the slower implementation of the fiscal stimulus measures that focused on the non-financial sector—which appear to have been implemented in the second half of 2009—kept them from mitigating the deepest growth contraction, which occurred in the first half of 2009.

A shrinking economy with low oil prices and high inflation creates a vicious circle for the Putin government. Falling incomes and the inability to finance the budget deficit by borrowing leads to budget cuts and further declines in domestic demand. During 15 years of Putin’s rule, the Russian economy has become enormously fragile and volatile. In the current crisis the government cannot make any decision in monetary or budgetary policy without risking making the situation worse. With a no-action policy, all hopes of recovery are pinned to the prospect of rising oil prices. But if Russia will not address the root causes of the crisis—property rights protection on the basis of the restoration of rule of law and political competition—no amount of increase in oil prices will make the Russian economy more stable.