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By HaleStewart December 11, 2014 8:14 am
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Russian Situation Deteriorates Further

          The Russian economic situation continues to deteriorate.

          Overall GDP growth has been deteriorating for the last three years.  Starting in 2013, the annual rate of growth slowed to between .7% and 2%.  However, the 2% rate of growth is clearly the outlier, as rates below 1% are obviously more common.

          Because over 50% of Russia’s exports and fiscal revenue spending come from the oil market, oil’s price collapse is adding to the problems.  The lower 90s clearly held important technical support levels.  But since prices moved below that level, they have been in a strong downtrend.  While analysts are speculating about an eventual rebound to the lower 70s, the economic damage is still occurring.

          Russia’s invasion of the Ukraine led to international sanctions and a collapsing ruble, which has yet to find a true technical bottom in its position relative to the US dollar.  This has led to a spike in import price inflation while also placing the central bank in the position of having to defend the currency. 

          To that end, the central bank raised interest rates a full 100 basis points at today’s meeting:

The Bank of Russia increased its key rate to 10.5 percent from 9.5 percent, according to a website statement. That matched the median estimate of 34 economists surveyed by Bloomberg. The ruble traded 0.7 percent weaker at 55.24 per dollar at 3:27 p.m. The bank is holding a news conference on the rate move.  

……

The rate increase shows the narrowing options left to policy makers after they spent about $80 billion on defending the currency and shifted to a free-floating exchange rate ahead of schedule last month. The central bank has said it’s ready step in at any time to prop up the ruble amid a depreciation that’s wiped out 40 percent of the currency’s value this year. Its reserves fell $4.3 billion last week to $416.2 billion.

          This will obviously have a very negative impact on growth prospects going forward.

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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