Things Could Get Much Worse For Russia

Saturday, December 20, 2014
By Paul Martin

DEC. 19, 2014

In the world of central banking slow, steady and predictable decisions are the aim. So when bankers meet in the dead of night and raise interest rates by a massive 6.5 percentage points it suggests something is going very wrong.

It is: the Russian currency crisis many feared is now a reality (see chart) and the mood in Moscow close to panic. Russians are right to worry: they are heading for a lethal combination of deep recession and runaway inflation.

Many of Russia’s woes start abroad. The country is highly dependent on its oil-and-gas firms. Hydrocarbons contribute over half the federal budget and two-thirds of exports. The state has big stakes in many energy firms, as well as indirect links via the state-supported banks that fund them. The oil price has fallen by almost half in the past six months–it dropped below $60 this week, its lowest level since the depths of the financial crisis. The rouble has followed oil down.

The war that Russia has fomented in Ukraine is the second big foreign problem. America and the EU have imposed financial sanctions on many Russian firms, making it hard for them to borrow abroad. On December 12th American politicians agreed to supply weapons to Ukrainian troops, raising the possibility of a further escalation in the conflict. There are plans for further sanctions in the pipeline.

Yet the crisis has now become more general. On December 15th Brent crude barely budged–it dropped by 1%–but the rouble plummeted, losing 10% of its value against the dollar, the worst drop since the previous rouble crash in 1998. The Central Bank of Russia is thought to have intervened, using $2 billion to buy roubles. This did not work, and nor did the midnight rate hike: the rouble lost another 11% on December 16th.

The Rest…HERE

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