Russia's central bank decided to raise rates by 6.5% this week. Such a startling move only just begins to reveal the dire circumstances Russia is facing. The Economist points out that all signs point to things getting worse in 2015.
The dollar-debt problem will get worse. Credit-rating agencies including Standard & Poor’s and Fitch were already pessimistic about Russia. With the central bank forecasting a 4.5% drop in GDP in 2015 a downgrade is a certainty. If debt is reclassified as junk, Russia’s investor base will shrink. The volume of debt may jump too. The blurred lines between the state and Russian firms mean the Kremlin may end up on the hook for much of the $614 billion in external debt owed by banks and other firms. No wonder confidence in the prop provided by the Kremlin’s foreign-exchange reserves, officially valued at $370 billion, is draining.
With rate rises and sales of foreign reserves proving ineffectual, Russia needs other options to stem the rouble’s plunge. One would be to try to negotiate extensions to bonds coming due in the hope of trimming demand for dollars, says Tim Ash of Standard Bank. A more muscular option, to which the central bank and the ministry of finance are opposed, is capital controls: the Kremlin could limit people’s ability to convert roubles into hard currency and take it out of the country.
Mr Putin may be inspired by Malaysia, which in September 1998, at the height of the East Asian financial crisis, choked off ringgit speculation by fixing the exchange rate and cutting interest rates. It capped the amount of currency residents could take abroad, and forced foreigners to hold proceeds from ringgit asset sales within the country. But Russia’s economy is in a worse state than Malaysia’s was and its lawless financial system would prove leaky.
Even if Russia does manage to impose capital controls 2015 will be grim. Before this week’s turmoil inflation was running at 9.1%. Now creeping price rises have been replaced by something more ominous: Russian shopkeepers have started to re-price their goods daily. Less than two weeks ago one dollar could be bought with 52 roubles; on December 16th between 70 and 80 were needed. Shops defending their dollar income need a price rise of 50% to offset this. Russian workers’ pay will be cut massively in real terms.
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