EDITORIAL: Reading Russia’s Rancid Economic Tea Leaves


Reading Russia’s Rancid Economic Tea Leaves

“Russia is now facing a perfect storm of falling commodity prices, weaker external demand, tighter credit conditions and slower real incomes growth for which no amount of currency adjustment can compensate.”

— Neil Shearing, an emerging-markets economist at Capital Economics Ltd. in London, in a research note dated December 5th.

Financial analysts are now predicting that the Russian ruble will depreciate 20% next year if oil remains above $30/barrel, 30% if it gets close to the $30 level.  Of course, the hit would be even more intense if Russia were not spending its precious reserves so furiously to artificially inflate the ruble’s value.  The Bank of Russia spent close to $15 billion last week defending the ruble, almost three times as much as it had spent the week before.

Experts believe that Rusia is simply wasting its precious and limited cash reserves by spending at this rate on the ruble.   They believe that the price of oil is far more power than the Kremlin’s reserve fund, and that the Kremlins’ spending is only creating a buildup of pressure that will burst sooner or later and lead to a catastrophic plunge in the ruble’s value that could set off a panic, the same thing that happened back in the 1990s.  Bloomberg quoted Win Thin, a currency strategist at Brown Brothers Harriman in New York:  “The pressure on the ruble will remain and Russia shouldn’t try to resist it by depleting its reserves. Oil producers are really struggling in terms of trade shock.”   A Russian banker told Time magzine that “only political considerations and fear of social unrest keeps the government from the devaluation of the ruble, which is the only economically sound decision now.”

Bloomberg states:

The 16 percent slide in the ruble is yet to match the decline in the currencies of commodity exporters including Australia and Mexico, which have fallen 33 percent and 24 percent versus the dollar since July.  Urals crude, Russia’s main export blend of oil, has slumped 68 percent since July to $43 a barrel, below the $70 average needed to balance the country’s budget next year. Russia has spent $148 billion or a quarter of its international reserves since August to defend the ruble.  Of the other “commodity currencies”, the Brazilian real slid 33 percent against the dollar, the New Zealand dollar dropped 30 percent, the Chilean peso 21 percent and the South African rand fell 23 percent.

So once again we see the Kremlin desperately afraid of basic economic reality, to such an extent that it will ravage the national security in order to hide that reality from the population.  How is this any different than what occurred in Soviet times? And why should we expect that it would be any different, given that Russia is ruled by a proud KGB spy?

To the extent it cannot be hidden, of course, it is ritualistically blamed on the United States — again the same as in Soviet times.  But many in Russia are not swallowing this garbage.   Time reports:  “‘Our crisis is entirely of our own making,’ says the noted economist Yevgeni Gontmakher, formerly adviser to the late president Boris Yeltsin adviser and Deputy Minister for Social Affairs during Putin’s presidency. He believes Russia’s ongoing problems are the result of policies Putin has put in place since 2000. ” 

So the Soviet “final solution” is of course in the offing, to use brutal repression to silence the critics within the country — just as was done with Anna Politikovskaya.  That is, unless the powerful Western governments intend to intervene and protect these true Russian patriots from the Kremlin madmen who would obliterate the country just as they did to the USSR.

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