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A sharp depreciation in the value of Russia's currency ruble added further pressure to the country's economy already weakened by plunging oil prices and Western sanctions, leading U.S. experts said.
The oil-dependent economy, they estimated, would contract about five percent next year if oil prices stay at around 60 U.S. dollars a barrel.
The ruble plunged to an all-time low in mid-December and had lost more than 45 percent of its value against the dollar since January, becoming one of the world's worst-performing currencies this year, as the gloomier Russia economic outlook drove investors to sell rubles.
Russia's central bank last week dramatically raised its key interest rate to 17 percent from 10.5 percent, in a bid to tamp down inflation and stem the currency's tumble. However, the surprise move, instead of reversing the downturn, only spooked markets further. The battered ruble, at one time, fell to a record low of 80 against the dollar from the average of 30 seen in the first half of this year.
Ruble's tumble was driven by "a combination of many factors," including the sharp decline of oil prices, the impact of financial sanctions on Russia, the slow growth in emerging markets as well as weaker commodity prices, Hung Tran, executive managing director at the Institute of International Finance (IIF), a leading global association of about 500 financial institutions, told Xinhua.
Tran said the stunning interest rate increase "failed to support the ruble," but the currency seemed to "have stabilized" at around 60 against the dollar after both the Ministry of Finance and Russia's central bank announced new measures to shore up the value of the ruble, including spending foreign reserves as much as 7 billion dollars.
"It is very small compared with the reserves at the central bank of Russia, but it signals the intention of the government to act in coordination with the central bank to support the ruble," he said.
If current measures are not enough to arrest the ruble's free- fall, Tran said the Russian government could introduce capital controls as the next step to prop up the currency
"One measure that has been raised and discussed is to require Russia exporters to turn in and sell their foreign-exchange earnings they generated overseas back to the central bank of Russia within a certain limited time," he said.
But Anders Aslund, a Russia expert and senior fellow at the Peterson Institute for International Economics, a Washington D.C.- based think tank, told Xinhua: "Russia is very reluctant to have any currency controls," because of policy experiences and massive capital outflows where capital controls remained in place until 2006. It's possible that will be introduced but not easily," he added.
"I don't think the central bank can do very much to help the situation. It can stabilize slightly, but the fundamental problem is bad economic policy, falling oil prices and financial sanctions from the West," he said, noting that the Russia's economy remains hugely reliant on energy, as oil accounts for half of federal government revenue and two-thirds of its total exports.
Tran also warned that "any one single measure by the Russian central bank" will not be sufficient to reinforce investors confidence in the ruble, unless oil prices start to rebound, financial sanctions could be rolled back and the Russia's economy begins to recover.
Sharp currency depreciation cost Russian firms dearly, which earn in rubles but need to repay debt in dollars and other foreign currencies. Western sanctions and geopolitical uncertainty have almost blocked access of Russian financial institutions and firms to international capital markets.
"It has turned out that the financial sanction has been very effective, far more effective than almost anybody thought at the beginning. So nobody today is prepared to give Russia any financing," Aslund noted. "Everybody is afraid of U.S. financial regulators. They are very careful not to do anything that can be considered to break financial sanctions."
Experts said Russia's economic outlook hinges mainly on Western sanctions and oil prices. "Any progress or lack of progress on Ukraine in the next few weeks or months will be important to see whether these sanctions will be softened or new sanctions will be applied. That will be very important to assess the economic outlook for Russia," Tran said.
If oil prices stay at around 60 dollar a barrel for a long period, falling by about 50 percent since June, Tran expected Russia's Gross Domestic Product (GDP) to decline by four to five percent next year, echoing Russian central bank's forecast of a 4. 5 to 4.7 percent contraction.
Aslund was more pessimistic, saying "Russia is going to face a significant period of severe economic situation." He estimated that Russia's export revenues will fall by 30 percent and imports will decline by 50 percent next year. Inflation will rise further above 10 percent and GDP will contract by 5 to 10 percent, he said.
While admitting the adverse impact of Western sanctions on the Russian economy, Russian President Vladimir Putin said earlier in his annual press conference that it would take at most two years for the Russian economy to rebound under the most unfavorable scenario.
