Russia's economic problems are getting worse Russia's currency, the rouble (RUB), has been falling rapidly in value. Content removed due to copyright restrictions An index of the real exchange rate fell from a value of 100 in 2010 to 75.8 in 2015 and this should have the effect of eventually helping to encourage exports. Source: Adapted from The Economist Table 1.1: Selected economic indicators for Russia 2013–2015 Economic Indicator | 2013 | 2014 | 2015 ---|---|---|--- Annual inflation rate | 6.8% | 7.8% | 15.4% Economic growth rate | 1.3% | 0.6% | –3.9% Nominal exchange rate (RUB per US$) | 38.4 | 56.3 | 61.3 Source: Adapted from The World Fact Book

Mark scheme

Marking points from the official mark scheme (May/June 2018). The mark or mark type is shown in brackets.

1. 2013: 38.4 RUB against the US dollar
2. 2015: 61.3 RUB against the US dollar
3. A fall of 22.9 compared with initial value of 38.4 = a fall of 59.63541%
4. Accept a fall of 59.6% or 59.64%
5. 1 mark for correct calculation method, but wrong answer
6. 2 marks for correct answer, even if no calculation method shown
7. A nominal exchange rate is one that is expressed in money terms without taking into account the effects of inflation (1)
8. A real exchange rate is one where a nominal exchange rate has been adjusted, taking into account the effects of inflation on the value of a currency in terms of its purchasing power / reflects the purchasing power of money at constant prices (1)
9. Diagram:
10. P, Q, D and S all correctly shown and labelled (1)
11. Shift of the demand curve for roubles to the left (1)
12. Explanation:
13. Russia's exports are heavily dependent on oil; the oil price has tumbled from its mid-2014 peak of over US100 a barrel to only about US40 a barrel (1)
14. This has meant that other countries needed fewer roubles to buy oil from Russia, causing a shift of the demand curve to the left with a resulting fall in the price and in the quantity traded (1)
15. Analysis of positive effects Up to 4 marks
16. Analysis of negative effects Up to 4 marks
17. Maximum of 6 marks
18. A depreciation of the Russian rouble would make exports cheaper, making them more price competitive on the international market, and this could lead to an increase in the demand for them. It would also make imports dearer, making them less price competitive on the international market, and this could lead to a decrease in the demand for them. The overall effect could therefore be an improvement in the current account balance, which would be advantageous to the Russian economy.
19. The actual effect of the depreciation will depend on the extent to which the demand for both exports and imports is price elastic.
20. Candidates could refer to the Marshall-Lerner condition which states that the depreciation will only lead to an improvement in the current account balance if the sum of the price elasticity of demand for exports and the price elasticity of demand for imports is greater than 1.
21. Candidates could also refer to the J-curve effect which states that the current account balance will get worse before it gets better.
22. Candidates could also refer to the fact that the imported goods could include imported raw materials and components, leading to an increase in the cost of production which would not be advantageous to the Russian economy.
23. In addition to the balance of payments effects, candidates may also consider possible inflation, employment and growth effects.
24. For identification and explanation of the possible benefits of privatisation (Up to 3 marks)
25. For identification and explanation of the possible costs of privatisation (Up to 3 marks)
26. (5 marks maximum for explanation)
27. For evaluative conclusion on the factors identified in relation to whether the privatisation of some state assets would be of overall benefit for the Russian economy. (1 mark for evaluation)
28. Definition of privatisation: the transfer of the ownership of a firm or an industry from the state or public sector to the private sector.
29. The sale of some state assets would bring revenue in. The sale of some state assets would reduce public expenditure on such assets. The overall effect of increasing public revenue and reducing public expenditure would be to contribute positively to a reduction in the size of the budget deficit in Russia, although it is uncertain whether this would be sufficient to bring down the size of the budget deficit from 7% of GDP to 3% of GDP. The privatisation of some state assets could also lead to an improvement in efficiency.
30. However, privatisation will lead to firms aiming for profit maximisation and this could lead to detrimental effects on the Russian economy, such as an increase in unemployment.