What Caused the Russian Financial Crisis of 2014 and 2015

Before Russia invaded Ukraine in February 2022, subjecting the Russian economy to steep sanctions from the international community, it faced economic turmoil that began in mid-2014 with the rapid collapse of the ruble in the global foreign exchange market. With the currency in a tailspin, Russian companies found it increasingly difficult to repay foreign-denominated debts—such as U.S. dollar-denominated debt. These dynamics took an early toll on the country’s economy, which was further hit in 2015 with sharply lower crude oil prices, although it had recovered slightly by late 2017.

Setting the Stage

The U.S. Federal Reserve’s low interest rates had a profound impact on emerging markets following the Great Recession that began in 2007. As investors sought out higher yields, capital flowed outside of the U.S. and developed countries and into the frontier and emerging markets. Companies eager to take advantage of these dynamics quickly accumulated U.S. dollar-denominated debt—including Russia’s debt that increased from 6.5 percent of GDP in 2008 to 13.5 percent of GDP by 2017.

With interest rates on the rise in the U.S., investors have become re-interested in the U.S. markets and capital began to flow out of emerging markets. The capital outflow has caused an economic slowdown, which has devalued many emerging market currencies like the ruble. Of course, these dynamics have made it increasingly difficult for foreign companies to repay dollar-denominated debt, which has further exacerbated the slowdown.

The upshot is that U.S. interest rates have been rising more slowly than many experts had initially expected following the first rate hike. While domestic employment has remained strong, wage growth and consumer price inflation have remained stagnant. The lack of improvement in inflation could put a cap on the pace of interest rate hikes over the coming quarters, which could provide some wiggle room for emerging markets when it comes to repaying debt.

Falling Oil Prices

Russia’s economy is heavily dependent on crude oil and natural gas, especially when it comes to state-owned giants like Gazprom. Between mid-2014 and early-2016, crude oil prices have fallen from a high of $107.95 per barrel to a low of $29.16 per barrel, cutting deep into the country’s major source of revenue. Investors have responded by selling oil equities, while there are broader concerns about the government’s ability to weather the storm.

The increased production of shale-based oil and gas in the U.S. could keep pressure on prices over the long term in the $75 to $80 per barrel range. While the Middle East initially kept production at a high to try and encourage shale operations to shut down, OPEC leaders have since reversed course and have relied on production cuts to boost prices. These dynamics helped crude oil prices rebound from their lows made in early 2016 to reach over $50 by 2017.

The upshot for Russia is that crude oil prices are experiencing upward pressure as the global economy continues to show signs of recovery and OPEC has committed to adhering to production cuts. While prices remain well below their highs made a few years ago, they are also well above their lows made in early 2016 and appear to be moving higher throughout 2017.

Economic Sanctions

Russia’s decision to invade Ukraine in mid-2014 resulted in a series of economic sanctions on the country by the U.S. and its allies. According to Russian Prime Minister Dmitry Medvedev, Western sanctions had cost the country $26.7 billion in 2014 and those costs may have increased to $80 billion in 2015. The value of the country’s foreign trade slumped approximately 30 percent during the first two months of 2015 alone, suggesting that things may get worse before improving.

The International Monetary Fund (IMF) stated the sanctions against Russia—which remained in place as of November 2017—have cost the economy an inflation-adjusted 1.2 percent of GDP. While these figures may appear small on the surface, they are significant at a time when the economy is struggling to stay out of a recession.

Economic sanctions have also had a direct impact on the ruble’s devaluation since Russian companies prevented from rolling over debt have been forced to exchange rubles for U.S. dollars or other currencies to meet their interest payment obligations on existing debt. Many Russian individuals have even resorted to purchasing durable goods in order to reduce their exposure to the currency risk—something that’s harder to do with economic sanctions.