Since the sanctions effort and downturn in global energy prices, Russia has faced a mounting set of challenges when it comes to stemming the slide in the Ruble. The global economic environment has made it extremely difficult to overcome slowing commodity demand and shrinking trade. When combined with the costly endeavors in the Middle East, Ukraine, and persistent domestic woes and falling government revenues, the economy faces an uphill climb when it comes to surmounting Russia from all sides. Strategies to improve the economy have been extreme, but the global growth environment remains a steadfast headwind.

Devaluation Benefit Subsiding

Last year’s tremendous devaluation of the Russian Ruble might have initially been a problematic development, but in many ways proved fortuitous as is mirrored the slide in the oil and gas prices, enabling the government to go ahead and make sure it saw revenues stay relatively intact. As of the latest estimates from October 10th, the Russian Government only expects to see the government run a deficit of 3.00% of GDP this year. In comparison to the 45% slide in oil prices, this is not bad considering other dollar pegged economies such as Saudi Arabia are seeing revenues collapse and sovereign wealth funds tapped to pay for the shortfall. Russia has seen the depletion of 25% of its total currency reserves in the last year alone, nearly $125 billion in an effort to support the economy.

Elevated Inflation Hampers Policy Adjustments

The Central Bank hemorrhaging reserves, while important, masks the real fight against inflation which currently tops 15%. Rates have come down substantially from the 17% seen last December, now sitting at 11%. It is amazing to see such a substantially high rate considering the global deflationary environment encircling advanced economies. Efforts to continue to bring down borrowing costs might nevertheless be dangerous considering the outsized moves lower in commodity prices recently. Fiat Rubles might have lost substantial value over the last year, but growing gold reserves which have doubled in the last five years from below 700 tonnes to 1352.2 tonnes could bolster the currency’s position over the long-term.