Case II: Capital Flight from Russia

Case II: Capital Flight from Russia The European Central Bank says capital flight from Russia since the Ukraine crisis erupted may be four times higher than admitted by the Kremlin a clear sign that sanctions pressure is inflicting serious damage on the Russian economy. Mario Draghi the ECB’s president said the outflows from Russia have been large enough over recent weeks to push up the euro exchange rate complicating monetary policy for the ECB. “We had very significant outflows that have been estimated by some to be in the of €160bn out of Russia” he said without specifying where the information came from. This is equivalent to $222bn. It is the highest figure suggested so far by a senior official with access to confidential data. In another development last year was a bad one for Russia. Oil prices began their free-fall from $80 a barrel to the $40-$50s range by year’s end (Source: The Telegraph May 2015). Questions i. Analyze and discuss the effects of “capital flight” and a declining “oil export revenue” on Russian economy particularly on its trade balance exchange rate of rubbles domestic interest rate domestic investment and savings (Hint: use the markets for loanable funds and the markets for foreign currency exchange approaches as discussed in class). ii. Use the AD-AS model to determine the effects to real GDP unemployment and the price level in Russia in both the short run and the long run. Assume the economy was in long-run equilibrium before this change and consider only this stated change. iii. Why and how the capital flight from Russia affect euro’s exchange rate? Why was the ECB’s president worry about the new development on euro’s exchange rate? iv. What kind of coordinated policies the Russian government may improve/change the situation both in the short-run and long-run? Requirements: 1 page | .doc file