Soon after the 2014 Winter Olympic Games in Sochi, Russia, the Russian currency, the rouble, lost value sharply against the US$. At the same time, Russian Gross Domestic Product (GDP) growth rates turned negative. These shifts were helped by political and economic instability in the region.
To prevent more financial capital leaving the Russian economy and to limit further weakening of the Russian rouble, the central bank of Russia raised the official interest rate to 17%. By 2016, the rouble had fallen even further, and the central bank was thinking about selling foreign reserves to lift the exchange rate against the US$.
On the whole, the Russian economy looked weak in 2016. Export values dropped and overseas investors had little confidence in the Russian economy. This affected unemployment rates and economic growth, and it also influenced poverty rates, which were predicted to rise back to pre-2007 levels. Demographic patterns made matters worse because Russia’s population fell as a result of a high death rate, a low fertility rate, and a high level of emigration.
However, domestic consumption and investment did show some encouraging signs. Consumers purchased more domestic goods and domestic investment rose. Even so, inflation increased and the central bank introduced policy measures to stop prices rising quickly.
As an oil producer, Russia’s economy was influenced by falling international oil prices. Saudi Arabia, the world’s second largest oil producer, kept raising oil production despite pressure from other producers to cut output. Also, worldwide demand for oil was weak. Table 1 gives the oil price from 2010 to 2016.
In 2016, domestic Russian oil producers found it difficult to make a profit because of economic uncertainty and competition from renewable energy. They also worried that making a profit might become even harder in future. This was because the government wanted to raise more revenue by increasing tax on oil producers. The government thought that such an extra tax would not really damage the large oil producers.
(a)[2]
Calculate, from the data in Table 1, the percentage change in the price of oil from 2010 to 2016.
(b)[4]
Explain, using information from the extract, two reasons for falling oil prices.
(c)[2]
Identify, using information from the extract, two ways a central bank might try to prevent a drop in the international value of its currency.
(d)[4]
Explain, using information from the extract, two reasons for Russia’s declining population.
(e)[5]
Analyse the extent to which a rise in oil prices will cause inflation.
(f)[5]
Discuss whether or not increasing taxes on Russian oil producers will be harmful to those producers.
(g)[2]
Identify one way in which monetary policy differs from fiscal policy.
(h)[6]
Discuss whether or not the Russian government should have been concerned about the state of the Russian economy in 2016.
Worked solution & mark scheme
This 30-mark question has a full step-by-step worked solution and mark scheme. One marking point: “54.9” …