RUSSIAN CRISIS

RUSSIAN CURRENCY CRISIS!!!!!!!!

Russia is facing currency crisis as its currency going down ... On December 15th its currency lost 10% of its value, having already lost about 40% this year. The central bank increased interest rates sharply, but instead of calming the market the hike was seen as a sign of desperation. The following day the ruble was at one point down a further 20% (and ended the day 10% lower). The central bank reckons that GDP could fall by 5% in 2015. Inflation is currently at 10% but is expected to accelerate rapidly. Russians are panic-buying; banks are running out of dollars. 

What’s gone wrong with Russia’s economy?

The problems were long in the making. Russia is highly dependent on oil revenues (hydrocarbons contribute over half the federal budget and two-thirds of exports) and over the past decade it has failed to diversify its economy. It is horribly corrupt, has weak institutions and no real property rights. The Kremlin distributes oil money via state banks to firms and projects which it selects on the
basis of their political importance and their pro-Putin stance, rather than trusting the market to allocate capital to the most efficient firms. If you look at wealth, Russia is the world’s second-most unequal country. Its working-age population is shrinking fast.

Western sanctions imposed in response to Russia’s meddling in Ukraine have dealt a blow to the economy. But the proximate cause of the turmoil of the last few days is concern about Russia's corporate sector. During 2015 Russia’s firms must repay $100 billion-worth of foreign debt. But as the ruble falls, paying back dollars becomes more difficult. Energy giants like Gazprom and Lukoil are in much worse shape than people had realised. Rosneft, an oil company, has been leaning on the Kremlin for financing. Earlier this year it requested a $44-billion bail-out from the Kremlin; on December 12th the central bank helped it out with a $7 billion ruble-denominated bond. The latter deal amounts to printing rubles to buy dollars—a sure-fire way to weaken a currency further. 

There is a real risk now that Russia's currency crisis could develop into a much bigger banking crisis. The population may start a run on the banks. A rash of corporate bankruptcies could leave the Kremlin on the hook for a big chunk of debt. No wonder confidence in the prop provided by the Kremlin’s foreign-exchange reserves, officially valued at $370 billion but in practice much lower, is waning. The Kremlin is praying for a resurgence in the oil price, but at the moment that seems unlikely. It could impose a moratorium on the repayment of foreign debt, but that would make it a pariah in the eyes of foreign investors. It could try to impose capital controls, to prevent money leaving the country; but even the prospect of such a move risks having the opposite effect, and hastening capital flight. Unless Russia is prepared to show serious commitment to reform—and moves to calm things in Ukraine—it should expect the economic turn oil to continue...............