Russia faces economic woes

The Russian economy is crumbling. A weakening currency and surging interest rates make for a deadly combination of economic contraction and rampant inflation, and Russia has both on its plate currently. The economy is now contracting and a junk rating now looms over its credibility status.

Sanctions and oil price drop hit Russia

The Russian economy had already been hit by sanctions from the West in retaliation to Russia’s annexation of Crimea from Ukraine and its continued support of the rebellion in eastern Ukraine.

Moreover, the $2 trillion economy’s gross domestic product recently suffered another blow. Russia is an oil-rich, export-oriented economy. A collapse in world oil prices affected funds like the United States Oil Fund (USO) and the United States Brent Oil Fund (BNO), and it also caused the Russian currency to depreciate to record levels. The ruble touched a low of 60.7 against the US dollar on December 31.

These key events have a material impact on investments in exchange-traded funds like the Market Vectors Russia ETF Trust (RSX), the iShares MSCI Russia Capped Index Fund (ERUS), and the SPDR S&P Russia ETF (RBL), which invest in Russia.

Inflation driven to record levels

The depreciating ruble, along with Western sanctions, has fueled inflation further. Russia imports large amounts of food, high-tech equipment, and cars. The weakening of the ruble has made imports expensive. Moreover, goods such as beef and fish have become 40% to 50% more expensive since the West imposed sanctions on Russia.

By December 2014, the inflation rate in Russia hit 11.4%. The market expects that it could climb higher by the end of this month.