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Cogito Ergo Non Serviam
Russia Hikes Rates to 17% to Defend Ruble
Faced with a collapsing currency, the Russian Central Bank opted to hike rates from 10.5% to 17% yesterday. The ruble has lost about half its value against the US dollar in the last year, and with oil prices under pressure, it was in danger of falling farther. The trouble is that the central bank has said that the economy will shrink by 4-4.5% this year if oil stays at around $60 a barrel. Higher interest rates will only make that worse.
To speak of a Russian economy, though, is to misuse the term. What Russia actually has is an oil and gas industry that wastes money subsidizing everything else. More supply from the US and weaker demand from Europe, China and Japan have combined to put the screws to the Russian oligarchs. Lower rates are needed to increase economic activity, but higher rates are needed so that Russian firms can earn sufficient foreign exchange to service the country's non-ruble debt.
Russia already tried defending the currency with interventions in the forex markets. So far this year, it burned through about $80 billion trying to prop up the ruble. With just under $420 billion more in the coffers, interest rate hikes were the only way to go. As much as $130 billion will flee the country this year.
"This is being driven by pure fear. We have crossed a line and the crisis is now self-feeding," Chris Weafer, from Macro Advisory in Moscow, told The Telegraph before the rate rise. "The central bank must intervene immediately with a great deal of money to overwhelm the sense of panic."
The Telegraph noted,
The crumbling rouble has effectively doubled the real burden of nearly $700bn in external debt, mostly owed by banks and companies, and mostly in dollars. They cannot roll over the loans because the global capital markets are shut for Russian companies.
These firms must repay $125bn by the end of next year. Several have already requested help from the state to meet their dollar obligations. Mr Weafer said others have built up a stash of dollars in reserves and should be able to weather the crisis.
So, it is almost guaranteed that the crisis Russia faces will be a recession of some severity and duration. The problem is that when Mr. Putin's economy cracks, and one can hear the initial shudders now, one cannot be sure of his response. Ideally, he realizes that he has no real hand to play in the next couple of years, and he adopts a less bellicose demeanor, mending fences with Ukraine, the EU and the rest of the world. That would be highly out of character.
Much more likely is that he will turn up the oppression at home and the sabre-rattling abroad. A good burst of hyper-nationalism is exactly the kind of distraction he needs at home. Ukraine is a plausible target, but there are other places he might decide need to be more Russified. He may not wish to go eyeball-to-eyeball with anyone in NATO, but if he were to pick on, say, Georgia, he'd probably get what he needed in terms of domestic support.
Economic collapses brought on due to credit crunches tend to take 5-8 years to go away, as the Great Recession's aftermath lingers yet. Russia may face tough times through 2022, when a fourth Putin presidential term would be ending (presuming he chooses to run again in 2016). Does Mr. Putin wish to end his presidency with a failed economy for a legacy, or does he want glory? Bet on things to get worse now, especially since the ruble hit a new low against the dollar after the hike.
© Copyright 2014 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
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