Influence of the global crisis on Russia in 2008
Influence of the global crisis on Russia in 2008
The recent global crisis has been a turning point in the economies of many countries. Its origin can be traced back to the economic meltdown that hit the USA starting the year 2007. The crisis was mainly felt across the world thereafter due to the economic influence of the countries that it later hit. The main cause of this crisis was cited as the lending of money to the different sectors with less pragmatic actions. These had been pegged on the expectations by economists that the money from sectors such as real estate and stocks would go up or remain steady.
The ripple effect was thus reflected on countries whose economies were dependent on the countries from which the crisis started. The prices of crude oil had just fallen drastically after an increase in production from countries like Kuwait and Saudi Arabia. This, consequentially, reduced the demand for oil and other petroleum products. Sestanovich and Kennan (2008) opine that the situation in Russia had been made more complex by the fact that its economy largely depends on the sale of oil and gas. These are the primary exports that mainly run the economy of Russia.
The prices dropped drastically from $147- $38 due to the fall in demand and prices after an intervention by the oil producing countries. This meant tat the economy of Russia had to slow down due to a slower inflow of cash into the economy. Economists therefore pointed out that the reliance on oil and gas that has characterised the Russian economy was the major cause of the drastic effect of the global crisis. The other cause of the crisis was the intervention of Russia in the war between Georgia and Ossetia.
This is due to the fact that many countries that did not approve of the manner in which the intervention was carried out protested by withdrawing their investments in Russia. Consequently, the outflow of cash caused a crisis in the banking sector of Russia. The direct effect of the crisis is that the country was forced to scale down on its expenditure. This was due to the fact that the economy of Russia is not industry-based as much as to enable it to survive the crisis. Therefore, the government went out of its way to support the sectors that it felt would be most vulnerable.
The priority fell on the financial sector. A consequence is that the deviation of resources from important projects caused an increase in poverty. This came as a result of lay-offs and a severe decrease in incomes. The purchasing power of citizens thus shot down significantly. The attempt by the government to address the crisis by bailing out the financial sector slowed down the rate of growth and thus the GDP went down. The growth of near 12% that had been projected before fell to 5. 6%.
There was an increase in interest rates on loans that locked out the middle and mostly lower class citizens. The activity in the stock market was seriously affected. Stocks dropped by nearly 70% causing uncertainty in the markets. This was another big cause of outflow of foreign investments. The use of reserves was imminent as the withdrawal of foreign investments decreased foreign currencies that were available. Consequently, the government had to start using its reserves, critically reducing it to dangerous levels.
The credit that the government owed its trading partners came into focus. Moscow had failed to come up with concrete means of paying back its credits. In as much as it finally paid back all it owed to other economies, its capital base had been reduced to a bare minimum. The crisis had wrecked havoc on the Russian economy and it was a matter of time before the country went into a some form of dependence on foreign aid – an issue the political class had not imagined in a very long while and had done all it could to stop it. None the less, the economy survived the crisis somehow.
To address the crisis, the government took several steps to make sure that it did not harm the economy further. The first step was to start production of goods that the foreign investors had been producing in Russia. This was aimed at reducing reliance on foreign countries. The political class, which had been praised for its former policies that ensured the country conserved more than it spent, decided to hold briefs where they would address different issues. First in line was the influence of the US on the global economy.
Dmitry Medvedev, Russia’s President, urged the US to ease its chokehold on the global economy as this would mean that other economies that depended on it largely suffer any time its economy does. The political class also reached an agreement that countries that are of interest should be trading partners with Moscow as it also increases economic influence and strategic positioning politically. In dealing with the rising cases of poverty, the government came up with policies that would go a long way in ensuring that housing and education would effectively be subsidised so as to relieve the citizens of heavy expenses on the two areas.
This had been necessitated by the decrease in the people’s ability to purchase basic goods and services. A stimulus package was also organised to augment other interventions that had been organised for in the labour market. An example of how this was to be implemented was the unemployment benefits, coming up with ways through which the unemployed could be given temporary jobs and even organising workshops to enhance employee skills while at work.
With the keen and pragmatic moves planned by the government, Russia was able to lift itself out of the global economic crisis. This would in the subsequent year prove to be a boost to its economy as dependency had been cut down to necessary levels while increasing production of goods from within. The dependence Russia has on petroleum products like oil and gas is thus slowly going down. Sestanocich & Kennan (2008) claim that the government of Russia should not back down on courting international interests as it had started before the crisis.
This is due to the fact that international relations increase chances of obtaining favourable trade partners. However, the relations that Russia had with most powerful nations had been drastic on their capacities to gain many partners to trade with. This had reflected on the how fast the countries that had invested in Russia wanted out once Russia started sinking in the crisis and when it decided to intervene in the conflict between Georgia and Ossetia. After grappling with the effects, Russia came out stronger and more economically independent.
A reliance on oil and gas had also started going down as other industries had been forced to provide home-grown solutions to lack of critical goods. In conclusion, the global crisis had so many economies shattered. This stemmed from the influence the economy of the US had on the global economy. Russia, as a country, experienced it in the worst form as it came at a time when the petroleum industry was not performing well. In as much as the crisis ravaged its economy, the immediate and near-comprehensive action taken by the government reduced the results faster than thought.
Apart from the crisis that Russia experienced in the year 1998, the 2008 one proved to be very costly. This is as a result on the expectations its citizens had after a good run in the global crude oil prices. The leadership of Russia has in effect been forced to look at a wider range of industries that the economy can rely on so as to spread risks. Finally, the global crisis, according to economists, did not reduce the economic influence that Russia had gained in the period before the crisis.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 25 September 2016
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