The Russian Pressure Cooker
Streetwise Professor notes that because of a new policy being implemented by the Russian Central Bank, the ruble has stopped plummeting in value and even clawed back a few cents from the U.S. dollar. Since the policy doesn’t involve spending massive amounts of foreign currency reserves to buy rubles and artificially inflate their value (“only” $3 billion was spent last week doing so, SP says), one might well ask: Why didn’t the Kremlin do this earlier?
The reason is quite simple, really. Because it’s suicidal, and the only reason the Kremlin is doing it is because it simply doesn’t have any other choice. It has already spent half its total foreign currency reserves, and it has to make the rest last longer.
So here’s what it’s doing.
It’s simply strong-arming Russia’s banks, threatening them that if they dare to sell any rubles there will be hell to pay. As SWP says, it’s the “Chekist solution.” At the same time, the Kremlin is starving the banks for rubles from Kremlin coffers, making sure they don’t have any extra to put into currency transactions in the hope of quick profits as the ruble descends. It does this by, as SWP puts it, “jacking up interest rates” to stratospheric levels.
Now even a first-year student of economics may well say: What?!?! Are they totally freakin’ insane? Don’t they realize that the main basis of the world economic crisis, which has impacted Russia far more than most countries, is the absence of liquidity in banks, and the absence of lending, and the ripple effects on economic growth?
Welcome to Russia,where the basic laws of economics have been ignored for centuries, which explains in no small part why first Tsarist Russia and then Communist Russia and now, quite possibly, KGB Russia have all found themselves spiraling into the ashcan of history.
And there’s more. According to SWP, it wasn’t only that the Kremlin inflated the ruble but also that Europe was undercutting the euro currency. Worries were spreading that too many euros had been plonked down on . . . wait for it . . . yes, you guessed it . . . Russian debt, which now looked shaky and might face refinancing or default. So Russia’s own incomptence, temporarily, was working in its favor!
What is happening now in Russia is that the Coke bottle of its economy is being furiously shaken by the Kremlin. It’s moving so fast that its hard to see the cracks and fissures that are developing in the bottle, but one day soon the inevitable will happen, just as it has happened so many times in the past in Russia when the basic laws of economics have been ignored.
That bottle will explode, and Russia will be covered in sticky goo.