Tuesday, 16 December 2014

The Russian crisis and the Eurozone: some economic context

Pretty dramatic things are happening with the Russian rouble. Its dollar value is as of yesterday just about half of what it was on average in 2013.

What does this mean for the eurozone? Over the course of the first decade of this century, oil revenues and the real appreciation of the rouble made the Russian economy much larger in euro terms than it had been, and it correspondingly became a more important export market for eurozone countries. The share of Russia in the eurozone's exports tripled between 1999 and 2008; while it has declined slightly since, 4.7% of eurozone exports went to Russia in 2013. Given that even the eurozone's anaemic growth since the financial crisis is entirely attributable to export growth, this is not insignificant.

Source: Eurostat, OECD, EIA, own calculations. Brent prices and export/import figures nominal

In the chart, I've tried to give some indications of possible impacts of the rouble's fall by recalculating 2013 figures on Russian and eurozone GDP at yesterday's exchange rate, and giving a rough extrapolative estimate of how much exports to Russia might fall as a result of the declining purchasing power of Russian consumers in euro terms.

This estimate suggests a fall in sales to Russia of 0.5% of eurozone GDP, which would be highly significant, especially to an economy growing as slowly as the eurozone's is.  However, there are potential compensating factors (and potential further dangers):

Potential compensating factors

  • Russia's demand for imports may prove inelastic (consumers may not scale back purchases proportionately to the rouble's fall).
  • The eurozone will be spending less on importing oil, improving its trade balance. If consumers and businesses spend and invest the money no longer going to oil, this will promote growth. 
Potential further dangers
  • In liquidity trap conditions, consumers and businesses may not spend and invest the savings from cheaper energy prices. Then falling energy prices would simply contribute to the severe risk of deflation in the eurozone.
  • There could potentially be serious consequences to the international financial system of Russian companies being unable to pay back dollar-denominated debt (see here for a relatively sanguine discussion of their payment prospects). Financial fragility means that relatively small events can have a big impact. 

No comments:

Post a Comment