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By HaleStewart March 18, 2014 9:24 am
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The Russina Central Bank Faces A Nightmare Scenario

With the situation in the Ukraine getting worse -- and with the threat of increased western economic sanctions against Russia an increasing possibility -- this appears to be a good time to take a look at the Russian economy to see if it could withstand increased trade problems.  Let's look at this from the central bank's point of view and the dual mandate most banks face: the need to encourage growth yet prevent inflation.

Let's start by looking at the annual rate of GDP growth.  While this number was fairly good in 2012 printing at 4.8%, the number has been in a clear downtrend with a very disappointing 1.2% annual growth rate over the last two quarters. 

Ideally, this situation would dictate to the central bank that a rate cut was in order.  Unfortunately, the exact opposite is happening:

Instead, the Russian central bank recently raised rates 150 basis points to defend the rubel, which was collapsing relative to other currencies.  

The rubel has collapsed relative to the euro, falling over 10% since the first of the year.  There is no reason to think this situation won't continue.

And the rubel's collapse certainly won't help the inflation situation:

The inflation rate has been running at over 6% for the better part of two years.

Above, we already have a central bank's nightmare scenario: slowing growth, a collapsing currency and high inflation.  From the central bank's perspective, there are no good policy options.  Raising the interest rate will undoubtedly slow growth and will most likely lead to a technical recession over the next few quarters (which will undoubtedly be aided by the international situation).  However, the bank literally had no choice.

 

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