Extract 1: 3 years of embargo in Russia The Winners and Losers

Three years ago, Russia imposed an embargo on the import of products from the EU, the U.S.,
Australia, and a number of other countries in response to Western sanctions. The supply of
beef, pork, poultry, fish, cheese, milk, fruit, and vegetables was banned. A few years have
passed, but who has won - and who has lost out - following the ongoing sanctions?
The ban predictably limited the choice of products on the domestic market. European fruits
and vegetables were replaced by products from Turkey, Egypt, Morocco, and dozens of
Middle Eastern countries. High quality European food - such a fine cheese - have been
replaced by products made in Russia or Belarus, and dont quite live up to the same standards.
The Russian government used the embargo as a protectionist measure for domestic
producers, which boosted small farming businesses in Russia along with the governmental
program of cheap loans (up to $250,000, 15 million rubles) for first time farmers launched in
2012. In 2016 small and mid-sized agricultural businesses were granted more than 9,200
loans totalling 191.5 billion Rubles.
Source: Russia Beyond the Headlines
Figure 1: Russias GDP and Consumer Prices Estimates

Source: International Monetary Fund

Extract 2: Whats gone wrong with Russias economy

Russia is in the middle of a currency crisis. Its currency has lost 10% of its value, having
already lost about 40% in 2015. The central bank increased interest rates sharply, but instead
of calming the market the hike was seen as a sign of desperation. As a result, the rouble
depreciated even further. The central bank reckons that GDP could fall by 5% in 2015. Inflation
is currently at 10% but is expected to accelerate rapidly.

The problems were long in the making. Russia is highly dependent on oil revenues
(hydrocarbons contribute over half the federal budget and two-thirds of exports) and over the
past decade it has failed to diversify its economy. It is horribly corrupt, has weak institutions
and no real property rights. It is the worlds second-most unequal country and faces rapid
shrinkage of the working-age population
Russia is praying for a resurgence in the oil price, but at the moment that seems unlikely. It
could try to impose capital controls, to prevent money leaving the country; but even the
prospect of such a move risks having the opposite effect, and hastening capital flight. Unless
Russia is prepared to show serious commitment to reform, it should expect the economic
turmoil to continue.

Source: The Economist, December 17, 2014

Figure 2: Contributions to annual GDP growth in Australia

Source: Guardian, 2 March 2016

Extract 3: Is the lucky economy running out of luck?

After 24 years of uninterrupted economic growth, Australia is entering the kind of difficult
waters experienced by every other major developed country in the past decade.

As unemployment rises, the slowdown in China hits home and demand for iron ore and coal
plummets, Australias buoyant economy is crashing back to earth

Demand for Australias iron ore and coal has plummeted from a decade ago as Beijing seeks
to scale back its huge building schemes and create a more consumer-led economy. The price
of the steel-making commodity, Australias biggest export, has fallen from $130 at the start of
2014 to around $50. Coal has halved in price in the past four years.

As a result, theres another headwind on the demand side. Real wage growth is doing nothing,
says James Glenn, senior economist at National Australia Bank. Our surveys show people
are nervous. They dont want to spend so instead theyre paying down debts and reining in
discretionary spending.

The way forward for Australia is not entirely clear but it will have to involve new markets and
job growth in different sectors. A weaker dollar will help exporters as well.

Source: Guardian, 15 April 2015

Extract 4: Singapore budget 2016, 2017

SINGAPORE is expected to have a budget surplus of S$5.2 billion for 2016, and this works
out to 1.3 per cent of gross domestic product (GDP). This is higher than the S$3.4 billion
surplus (0.8 per cent of GDP) that was budgeted in 2015, said Finance Minister Heng Swee
Keat.

A basic deficit of S$5.6 billion (1.4 per cent of GDP) is expected after the government's top-
ups to funds and Net Investment Returns Contribution from past reserves are excluded. As
such, the 2016 budget should be considered expansionary.

For 2017, the budget remains expansionary, with the ministries' expenditures likely to be
higher than the previous year at S$3.7 billion. Overall, a smaller budget surplus of S$1.9 billion
(0.4 per cent of GDP) is expected in 2017

"As we expect expenditures to continue rising in the long term, this budget position is prudent,
while supporting firms and households in the midst of continued economic restructuring," said
Mr Heng.
Source: The Business Times

Questions

(a) Describe the trend of consumer prices and GDP in Russia [2]

(b) (i) Describe and explain the relationship between the two variables in (a) [3]

(ii) With reference to Figure 2, explain how variations in net exports and [4]
investment would affect Australias current account balance from 2010 to 2015

(c) Explain, in the context of Australia, how a weaker dollar can help improve
exports. [3]

(d) Discuss which macroeconomic problem should be the top priority for Russia.
[8]

(e) With reference to relevant data and your own knowledge, discuss whether
protectionism or an expansionary budget is the better policy to achieve the
macroeconomic and microeconomic objectives of a country. [10]

[Total: 30 marks]