Russia's economy is headed for a meltdown, say commentators
Despite having increased interest rates to 17% on Monday, Russia’s central bank has failed to stop the rouble’s volatile free fall into the abyss, prompting fears of an imminent economic meltdown.
On Monday, the rouble fell 24% lower to 78 against the dollar, forcing a drastic increase in interest rates from 10.5% to 17%. The currency made a modest comeback in Wednesday’s mid-morning trading growing to just over 68 to the dollar, but the Russian economy is not out of the woods yet.
The #Rouble has seen a turbulent week, but will this force #Russia's central bank to allow capital controls? pic.twitter.com/VIPk7y05ul
— Melissa Parvis (@MelissaParvis) December 17, 2014
Oil prices are continuing to trade flat following last week’s 40% drop, stirring up trouble for the ex-Soviet nation’s economic health. As half of Russia’s government revenue comes from oil and gas exports, the falling value of oil is having dire implications for the nation’s currency.
At the same time, western sanctions are cutting off banks and companies from refinancing their dollar and euro debts in western capital markets, preventing the economy from attaining a healthy capital flow.
Meanwhile, foreign currency debts are quickly becoming more unstable as the rouble plummets against other major world currencies. The rouble’s tumble is making it harder for Russian businesses and financial institutions that borrowed in dollars to pay off their debts, which are growing as the rouble slides.
In response, waves of Russians are panic-buying less volatile assets and swapping their roubles for dollars and euros, leading to mass currency flight within the emerging economy.
Russian shoppers on Tuesday were said to be rushing to buy goods before the currency lost more value, while some banks ran short of cash as customers stocked up on dollars and euros.
Deputy governor of the central bank, Sergey Shvetov responded to the rapid change in economic outlook: “I couldn’t imagine even a year ago that such a thing would happen- even in my worst nightmares,” the Financial Times quoted him as saying.
The crashing currency is pushing up the cost of imports and stoking inflation, which is a pertinent issue for Russians who rely on imports for a large percentage of food products.
Solutions to the crisis are limited, especially as Russia’s minister of economic development Alexei Ulyukayev announced yesterday that the Russian Federation will not consider capital controls to stop currency flight.
To make a turnaround, Russia’s most viable option would be to enter negotiations with the west to lift the current sanctions held against it. Of course, that would require Russia to give in to the west’s demands regarding Ukraine, which is unlikely considering Vladimir Putin’s past behaviour.