Wow. Russias economy just imploded over the last couple of days, with the collapse of the Russian Ruble. The Russian economy has been in trouble for months, but last night, things got absurdly bad. The value of the ruble dropped as much as 19 percent in the last 24 hours, the worst single-day drop for the ruble in 16 years. Now Russians are reportedly bum-rushing malls to swap cash for washing machines, TVs, or laptops—anything that seems as if it might hold value better than paper money, whose worth is evaporating in real time.[1] Over the summer, the exchange rate was ~35 rubles per $1USD. As I write this, it is over 72 rubles per $1USD, and still falling. And this is just the official exchange rates. A correspondent for CBS News Radio reported that after Russian banks froze the exchange of rubles for foreign currency, private currency traders were getting 100 rubles on the dollar, and 120 rubles per Euro, from panicking ruble holders looking to shed their devalued currency for anything out there. Russias economy has been hurt by two big things: the falling price of oil and economic sanctions stemming from their stunt in Crimea, exacerbated by their counter-embargo. We had written about the affects of the latter in October: https://facebook/WeAreCapitalists/photos/a.157549024416648.1073741826.157541337750750/325895477582001/ The weaker ruble is stoking inflation by driving up prices for imported goods and creating worsening debts for companies that borrowed from Western banks. Some forecasts see inflation hitting 25% by next year.[2] At midnight on December 15th/16th, the CBR [Central Bank of Russia] announced a 6.5% rise in the interest rate. This sent completely the wrong message. Instead of calming markets, it was inevitably interpreted as panic. By morning, confidence in the CBR had evaporated and the ruble was in freefall.[3] The recent trigger that pushed the ruble over the cliff is the lowering oil prices. Falling oil prices to the lowest levels since 2009 because of a production glut is a huge blow to Russia: Two-thirds of its foreign currency earnings come from oil exports, which finance half its annual budget.[2] If the oil price stabilized at say $65 a barrel, the ruble would also stabilize, the Russian economy would be down but not out... Despite appeals from its smaller members such as Ecuador and Venezuela for production to be cut, OPEC has allowed the oil price to fall freely. On November 27thit announced that it would not cut production. And on December 15th, the United Arab Emirates’ Energy Minister suggested that oil could fall as low as $40 a barrel... This was disastrous. The CBR’s worst-case scenario for the Russian economy assumed the oil price would fall to $60 a barrel. A price of $40 a barrel was simply unimaginable. Russia’s economy is terribly dependent on oil: if the oil price falls so low, severe economic recession is inevitable and default becomes a real possibility. The ruble’s slide worsened, bond yields spiked and CDS rose exponentially as capital flight intensified.[3] Some analysts are comparing Russias current situation with the eve of the Soviet Unions dissolution, when oil prices were also at a low ebb. Some speculate that the deepening economic crisis will impose new challenges to Russian President Vladimir Putins tenure, forcing him to apply a defensive strategy. But there are also some concerns about him becoming more aggressive. This speculation raises a question: Is Russias economy worse now than the time when the Soviet Union collapsed? Compared with 23 years ago, Russias manufacturing capacity and agricultural production have not greatly improved, and its much diminished strength has not left much room to maneuver. Whats more, Moscow now faces Western sanctions and there is deep antagonism between Moscow and Washington.[4] In other, classic examples of emerging market crisis, countries tend to seek external help. But Putins actions in Ukraine, which has seen Moscow annex the Crimean peninsula and fuel an internal battle between Kiev and pro-Russian separatists, have increasingly isolated him from the world powers....said Professor Nesvatailova, Only external help may come from China, which will ask for something in return.[5] It will be interesting to see how Russias closest ally, China, respond to their crisis. China has become a significant factor that determines Russias strategic environment. Seeking Chinas support is one of Russias most realistic options...China-Russia cooperation is no longer ideology-based but driven by common interests. Although it has the capability to offer help to Russia at critical moments, China does not have to act in a proactive manner.[4] China must surely be reconsidering the currency-swap agreement made with Russia in October, an agreement involving a ruble-yuan exchange worth $25bn over 3 years. [6] Will China have Putins back, and bail out Russia? Or will China stab him in the back, and cash out? [1] businessweek/articles/2014-12-16/no-caviar-is-not-getting-cheaper-everything-you-need-to-know-about-the-russian-ruble-collapse [2] usatoday/story/news/world/2014/12/16/russia-ruble-fall-oil-putin/20476411/ [3] forbes/sites/francescoppola/2014/12/16/how-opec-destroyed-the-russian-ruble/ [4] globaltimes.cn/content/897151.shtml [5] ibtimes.co.uk/will-russia-ruble-collapse-trigger-military-coup-against-vladimir-putin-1479815 [6] rt/business/195556-russia-china-currency-swap/
Posted on: Wed, 17 Dec 2014 15:00:01 +0000
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