Bank of Russia predicts economy drop and potential recession

Bank of Russia predict economy drop and potential recession for Russia

Russia’s central bank expects the country to collapse into recession this year because of sanctions put in place by Ukraine and the sudden drop of oil prices in 2014.

In order to avoid this, the bank will need to be more conservative with their reserves as they were hesitant to utilise their FX and gold to support their economy last year. However, the bank has already said that they would increase their reserves from $360 billion to $500 billion over the next few years to solve this problem, according to Reuters.

Russia’s specific situation requires a more conservative approach (towards reserves) which should take into consideration the possibility of long-term restrictions to access to foreign markets and the need to cover potential significant capital outflows in the next two to three years,” Bank of Russia said.

Moreover, the bank announced that they would introduce FX liquidity injections and market interventions to reinforce the Russian economy further, if risks became apparent.

Bank of Russia’s Financial Stability Review outlined how regardless of how well hedged Russia has been in the past, the rouble could drop at any time and the country is not prepared for any big changes in global economy, such as the US Federal Reserve increasing rates.

It also explained how Russia is able to retain a stable economy because the current oil price is between $60 and $65 per barrel and chief exporters could even drop prices as low as $40 per barrel, if necessary.

Despite saying that corporates should be able to pay off the $65 billion in foreign debt by the end of the year and repo operations should cover potential foreign currency liquidity shortage, the report also said that overall corporate debt remains very high. “Given the high debt burden of the corporate sector, deterioration in the quality of companies’ loan portfolios will continue,” the report said.