Russian economy now heading down the drain

As we all know, oil prices have collapsed from their highs over the last few months. One of the nations really affected by this is Russia. The oil and gas resources they have are difficult and expensive to get out of the ground and transport to customers.

On top of that, thanks to Putin’s desire to rebuild the Soviet Empire, or at least the old Czarist empire, Russia has started to run out of money. Because of Putin’s empire building, the United States and other nations have imposed economic sanctions on Russia. Because of this and the low oil prices, Russia isn’t getting any hard currency in.

This wouldn’t normally be a problem except that Russia doesn’t have that wide an economic base. Rather than build Russia’s economy and diversify it as much as possible, Putin has instead reverted to type, (Thuggish criminal), and put everything more under his and his supporters control. Well, the balloon has popped and the the Russian Ruble is collapsing in value. Here are a few details from Fox News:

The Russian ruble faced intense selling pressure Tuesday, falling at one stage by a whopping 20 percent to historic lows despite a massive pre-dawn interest rate hike from the country’s central bank. The surprise decision to raise the rate to 17 percent from 10.5 percent came in the middle of the night and represented a desperate attempt to prop up the troubled currency. The ruble has fallen sharply in recent weeks as a result of sliding oil prices as well as the impact of Western sanctions imposed over Russia’s involvement in Ukraine.

Raising the interest rates, especially that high, is a desperation move, and as of now, isn’t working. This also doesn’t bode well for good old Vladimir Putin.

The collapse in the ruble, which has spurred ordinary Russians to buy imported products such as fridges and cars and is stoking inflation, is likely to heap pressure on President Vladimir Putin. Still, support for Putin appears to be holding up. State television, meanwhile, urged citizens not to panic amid Tuesday’s rout.

Yeah, that won’t last, and when the food runs out and the Russian Ruble is only good for toilet paper, well, Putin might have to start looking over his shoulder.

Timothy Ash at London-based Standard Bank described the ruble’s fall as “the most incredible currency collapse I think I have ever seen in the 17 years in the market, and 26 years covering Russia.”

Ash said “there is now a huge credibility gap for Russian policy makers in the eyes of the market” and that the decline is all the more astonishing given Russia’s solid foreign currency reserves and the fact that it runs a budget surplus.

That budget surplus was due to $100+ a barrel oil. Now that oil is heading south of $60 a barrel, that surplus is going to go away fast. Right now, Russians are heading to the stores to buy as much as they can before the prices start going up. According to the Daily Mail:

Russian consumers flocked to the stores Wednesday, frantically buying a range of big-ticket items to pre-empt the price rises kicked off by the staggering fall in the value of the ruble in recent days. As the Russian authorities announced a series of measures to ease the pressure on the ruble, which slid 15 percent in the previous two days and raised fears of a bank run, many Russians were buying cars and home appliances — in some cases in record numbers — before prices for these imported goods shoot higher.

I am not an economic genius like Paul Krugman, (Well, he might be a bad choice for a comparison), but if people are panic buying big ticket items, I suspect they see a major increase in inflation coming. If that happens, and people have loan agreements already in hand, then as they start getting more rubles, even though they are worth less, as far as the contract goes, their payments remain the same.

For instance. Ivan buys a new BMW and gets a car loan for 100,000 rubles. Next month, the ruble is worth less then dirt and Ivan is getting paid by the wheelbarrow load. He still only owes 100,000 rubles even if his take home pay is 1 million rubles a week. So he can pay off the 100K ruble loan he owes for next to nothing. He can then turn around and sell that BMW for hard currency.

The next major problem will be potential bank runs. If depositors don’t think their banks are solvent, they will want to get their money out in currency as fast as possible. This is a real possibility according to Bloomberg:

The Russian economy may come to “a sudden stop” and a bank run “could be in the cards,” according to an analyst at Moscow brokerage UralSib Capital.

“A full-blown currency and financial-crisis scenario seems to be unfolding in Russia in what was supposed to a quiet week as we head into the holiday season,” Slava Smolyaninov, deputy head of research, wrote in an e-mailed report today. “There is a risk that the economy will come to a sudden stop, along with the banks and the overall financial system. Hence, we may have underestimated the level of financial risk in the event of a full-fledged panic. A bank run could be in the cards.”

And these people taking their rubles out are not going to keep their assets in that currency. They’re converting it to other, more stable currencies such as the U.S. Dollar.

Banks in Moscow, including Citigroup Inc. (C), ZAO Raiffeisen and Khanty-Mansiysk Otkritie Bank, yesterday reported a surge in demand for foreign currency as the ruble continued to slide after a plunge in oil prices. The currency has lost almost half its value against the dollar this year, a decline yesterday’s interest-rate increase initially failed to halt.

Now Russia is sitting on some $450 billion dollars in various foreign currencies, and can use that to stem the tide. However, that money is going to run out. When that happens, all those Russian Oligarchs who have been supporting Putin are going to wonder if they might be wise to end that support. As long as they weren’t personally affected by Putin’s shenanigans in Crimea and the Ukraine, they didn’t care. Now, his policies are hitting them in their personal wallets. They might decide it’s time for Putin and his cronies to step down from the reigns of power and retire to those nice Dachas on the Black Sea. If that happens, and Putin doesn’t take the hint, well, he could be forced to step down to ill health, the illness caused by a copper jacketed brain tumor.

Of course, Putin isn’t an idiot and if things start looking bad for him, he might just decide to do two things. First, move against the oligarchs before the move against him. He has done this in the past. This could lead to a civil war of sorts in Russia as each side maneuvers against the other. The other possibility is Putin does what all tyrants do when they have problems at home. That is start a war.

Putin’s already been trying to conquer the Ukraine, mostly by proxy, however, he’s also been eying the Baltic States as well. This could be a major problem since those states are now part of NATO. The plus side of this is that Putin’s military really isn’t that good. They need to do even more of an upgrade and expansion then we do, and frankly, as we saw in the two gulf wars, their tanks suck.

My bet is Putin goes down eventually, but not before he does a lot of damage, mostly to Russia and a few nearby countries. I don’t think that, even with his arrogance, he wants to face off against the United States militarily. Even in our weakened state, (Which if Putin does something really stupid, will change rapidly), we could rip up the Russian military rather badly. As to his nuclear weapons? There is some question regarding their actual ability to launch them.

No, I don’t think that Putin wants to go to war with the West. I do think he might try to bluff Obama into bailing him out in some way, and since I think that Obama has been working with the Russians going back to his collage days, I won’t be at all surprised if we see another one of his “Executive Orders” make an appearance. However, that’s something for another day.

Thatisall

~The Angry Webmaster~

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