It is well known that the state of the Russian economy is heavily dependent on prices for natural resources it exports. Export of natural resources creates huge capital inflows which in turn pushes the ruble exchange rate up. When prices for oil and gas drop, the ruble goes down as well, and these drops could be very sharp.
In order to protect the economy from fluctuations in prices for natural resources the government has a so-called Stabilization Fund. There is a budget law that sets the size of this fund to be at 3.7% of GDP. The current size of the fund is $84 billion. When oil and gas prices are high fund grows, when they drop the government has money to spend to help the economy.
Not less important for business is the stability of national currency. During 2000 to 2012 the government received $2 trillion from exports of oil and gas. Compare it with just $200 billion received during 1992 to 1999. Such massive inflow of petro-dollars pushed the real ruble exchange rate to dollar 140% up. The dollar became more affordable for citizens and businesses. It became cheaper to import the goods.
A strong ruble is not good for the economy and in order to prevent such a sharp rise of the ruble, the Russian central bank once bought large amounts of dollars using printed rubles. (The large inflow of dollars has to be exchanged into rubles, and demand for rubles rises and exchange rate goes up. Therefore, the amount of rubles in the system has to increase in order to stop the national currency from rising.) But increasing the amount of rubles creates inflation, so now this policy is corrected to keep inflation from growing.
Inflation, however, still stands around 7%. The real ruble exchange rate also goes up when inflation in Russia is exceeding the inflation in the neighboring countries. Russian goods become more expensive than imports. This effect is responsible for growth of volume of imported goods and services from $40 billion in 2000 to $440 billion in 2012. Growth of imports exceeded growth of GDP by a great margin, making goods produced in Russia not competitive enough.
If spending of petro-dollars by the government is not controlled, the Russian economy gets hit twice: First imports grow and second the internal credit rates for businesses have to remain high in order to stay higher than inflation. High borrowing rates make it very hard for businesses to operate because profitability margins have to exceed borrowing cost. Many businesses borrow money today at rates of 15% and higher.
As we know, there is inverse correlation between interest rates and overall performance of the stock market. High interest rates could be responsible among other factors for sluggish growth on the Micex index. At the same time, the Russian stock market remains the most undervalued in the world. Stock market capitalization to GDP is only 35%, compared with 108% for the U.S. and 55% for China.
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