Accessibility links

Breaking News

Russia's Economy Begins Shrinking

People walk past electronic display board with figures indicating US dollar to Russian ruble currency exchange rate, St. Petersburg, Russia, Dec. 29, 2014.

Russia's battered currency fell sharply on Monday after a government report showed the economy shrank in November, and predicted a four percent decline next year.

At one point Monday, the Russian ruble was off six percent, trading around 56 to the dollar.

It is the first time the economy has declined since 2009, and follows sharply falling prices for Russia's key crude oil exports. The slide on the oil market accelerated this month after the exporters' group OPEC refused to cut output, and prices are down almost 50 percent from a peak in June.

The economy has also been damaged by sanctions related to Moscow's actions in Ukraine that deter foreign investment and make it hard for Russian companies to borrow money from Western sources. To date, sanctions have caused an estimated $100 billion to flood out of Russian markets this year.

In an interview aired Monday by National Public Radio, U.S. President Barack Obama said he thinks steady sanctions pressure would make the Russian economy so vulnerable that disruptions in the price of oil would make the economy enormously difficult to manage.

The president said even before oil collapsed, Russia’s economy was showing signs of weakness.

The economic troubles have prompted many investors to move their money out of the country, and encouraged people who hold rubles to exchange them for more stable currencies. With many people selling rubles and few buyers, the price of the currency dropped.

Overall the ruble’s weakness will inevitably lead to higher inflation next year by pushing up the cost of imports, threatening President Vladimir Putin's reputation for ensuring Russia's prosperity.

Government ministries forecast the slump in oil prices will lead to a 4 percent contraction of the economy next year and that inflation could exceed 10 percent.

Russians have kept a wary eye on the exchange rate since the collapse of the Soviet Union. Hyper-inflation wiped out their savings over several years in the early 1990s and the ruble collapsed again in 1998.

On Friday, Russian authorities also significantly scaled up rescue funds for Trust Bank, saying they would provide up to $2.4 billion in loans to bail out the mid-sized lender, the first bank to fall victim to the crisis.

Portions of this report are from Reuters.