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By HaleStewart December 16, 2014 7:55 am
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Russia: Yes, We Can Call It A Currency Crisis

     I've written extensively about the deteriorating Russian economic situation (see here, here and here).  In the broadest terms, growth is slowing and inflation is increasing.  International sanctions as a result of Russia's military advances are preventing Russian businesses from re-financing debts.  Oil's slide added to the economic pressure because over 50% of Russia's exports (read: hard currency) and fiscal revenues come from the petrol trade.  In response to these developments, the ruble has been dropping sharply.  Although the central bank has been intervening in the market in an attempt to slow the ruble's slide, it has had no effect.

     Now the Russian central bank has made an incredibly sharp move, by raising interest rates 6.5% to 17%:

In a surprise announcement just before 1 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17 percent from 10.5 percent, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100 percent and the government defaulted on debt.

The ruble lost 2.5 percent to 66.0985 against the dollar as of 12:53 p.m., reversing an early gain prompted by the news.

The announcement, as well as its timing, underscored the financial straits in which Russia now finds itself. If sustained, the new higher rates would squeeze an economy that is already being hurt by sanctions led by the U.S. and European Union, and by a collapse in oil prices. Some analysts said they doubted the economy could withstand such high rates for long.

The sharpness of the increase can be considered a central bank hail Mary; they are attempting to stop the downward advance of the ruble by essentially stating they will do "whatever it takes" to stabilize their currency.  Unfortunately, the central bank's actions have all but guaranteed a recession will occur.  And the potential severity of that event is increasing with interest rates.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

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