The world’s most economically fragile developed nations are having an especially rough time lately. The 2008 crash continues to be felt in Greece. Falling oil prices have hit Petro States Russia and Venezuela especially hard. The Ukraine has suffered as a relatively young government fights with Russia and tries to manage runaway inflation.
No Eurozone country has suffered more since the crash of 2008 than Greece. Employment has fallen 22% since then, with more than 1 million jobs lost; household income dropped by 30% in three years; and investment and consumption are near zero, according to the Levy Economics Institute at Bard College. In October, one of every four Greeks was unemployed. The ratio of central government debt to gross domestic product hit 176% by the third quarter of 2014.
The January 2015 victory by the left-wing Syriza party set the country up for a showdown with creditors. That reckoning was postponed in February 2015 when the government and Eurozone finance ministers agreed to a four-month extension of bailouts, and Greece promised to crack down on tax evasion and corruption.
Falling oil prices, soaring inflation, international sanctions due to conflict with Ukraine, and skittish foreign investors continue to pummel the Russian economy. The rouble is falling. Inflation rose 15% in January. The World Bank’s December 2014 baseline projection, its most recent, was that Russia’s real GDP would contract by 0.7% in 2015. Not surprisingly, the Composite Leading Indicators has taken a nosedive.
A dependence on oil exports, barriers to foreign direct investment, and continued state control remain stumbling blocks. Soaring inflation, as well as President Vladimir Putin’s ban on food from sanctioning countries, means Russians may spend half their income on food this year. The February murder of Putin critic Boris Nemtsov and the bestseller status of Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice, about a hedge fund manager’s battles with Putin’s government, mean capital outflows are unlikely to reverse.
Russia’s March 2014 annexation of the industrial Crimean peninsula sent Ukraine into a full-blown financial crisis. The IMF projected a 6.5% contraction in GDP for 2014, but the country’s top central banker told reporters that the actual decline was probably worse. Its currency, the hryvnia, was the worst performing in the world in 2014, with declines so precipitous that the central bank temporarily banned currency trading in February 2015, before quickly reversing itself. In March 2015, the central bank raised its benchmark interest rate to 30% in an effort to control hyper-inflation,
Reserve losses, deposit withdrawals, currency depreciation, and loan deterioration continue to add to economic stress. The IMF, which projected that 2015 inflation would climb to 14%, committed to a $17.5 billion loan package to Ukraine on February 12, 2015.
Declining oil prices have been devastating for Venezuela. The IMF forecasts that its economy will decline by 7% in 2015, calculating that each $10 decline in oil prices worsens Venezuela’s trade balance by 3.5% GDP. A large share of public spending coming from oil revenues and domestic gasoline prices near zero almost eliminate any revenue from domestic sales.
The central bank said in December 2014 that GDP had contracted in each of the first three quarters by 4.8%, 4.9% and 2.3%. Twelve-month inflation reached 63.6% in November, the highest in the Americas.
The Bottom Line
Barring a sharp spike in oil prices, which would help Russia and Venezuela, turning around the economy in all four countries will be a years-long challenge.