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Economist: Long Painful Recession in Store for Russia

Economist Says Long Painful Recession in Store for Russia
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Russia's battered currency fell sharply again this week after a government report showed the economy had shrunk in November, the first such decline in five years. The Russian government recently announced steps to stabilize its banks and bolster the value of the beleaguered ruble. But experts say the country still faces a recession next year.

Despite the holiday lights - the economic prospects for Russia have dimmed. Its currency has lost more than half its value this year and banks are running low on cash. It’s a situation that's bound to get worse before it gets better -- says economist Uri Dadush at the Carnegie Endowment for International Peace.

“Russia is facing a cliff really next year, the likelihood of a very severe recession and of course, there’s a massive confidence crisis at the moment,” he said.

Investors have already pulled more than $100 billion out of the country. To stabilize the ruble and keep its banks afloat, Moscow sharply raised interest rates and recently announced plans to pump nearly $20 billion into Russian banks.

“All these measures together will allow our banking sector, which is quite stable already, to be even more stable under the new circumstances and safeguard it from new shocks if they do occur,” said Deputy Prime Minister Igor Shuvalov.

But any new shocks will hit Russian consumers the hardest. Most have seen prices for imported goods soar.

“Let’s hope that our government will use their brains and will not let us become poor,” one woman said.

Economists blame the crisis on Moscow’s failure to diversify its energy-based economy. Add to that the rapid decline in oil prices and economic sanctions imposed by the West to punish Moscow’s aggressive policy in Ukraine -- and White House economic adviser Jason Furman says Russia has only itself to blame.

“And it’s a serious economic situation that is largely of their own making and largely reflects the consequences of not following a set of international rules,” he said.

The U.S., which does very little business with Moscow, is largely immune. But trading partners like China and Europe are likely to feel the pain. Just 30 kilometers from the Russian border, in the southeast corner of Finland, Russian tourists have stopped coming to the small town of Lappeenranta. As a result, town officials say more than a thousand stores will probably have to close.

Unless oil prices rise quickly or Russian President Vladimir Putin changes his mind on Crimea, economist Uri Dadush says it could take years for Russia's economy to recover.

"I think its premature to say that this will force Mr. Putin's hand," he said. "More likely is a prolonged period of suffering by average Russians and the Russian economy in general, and then at some point over the next two to three years -- the economic situation will stabilize again."

"We have been in much worse situations," said Russian Foreign Minister Sergei Lavrov, who says the crisis is unlikely to last that long. And he says history suggests the Russian people and the economy will recover, emerging even stronger than before.