Friday, October 17, 2014

Financial Comment - Putin bites own nose to spite Russia's face

The once relatively worthless ruble drops to ever new lows

Economic madness, sister of political recklessness 

The new national sport in Ukraine, oil-price and Russian-ruble watching, is opening new horizons. Amid the dramatic drops in equity markets globally, the price for oil is steepening its decline (almost 10% down just over the past week) while the ruble has crossed an important psychological level at 40 per 1 U.S. dollar and reached 41 earlier this week (7% down over the past month). But this is not so exciting anymore – things are turning really serious for Russia.

According to Bloomberg, Russian companies will have to pay back $55 billion of debt by the end of 2014. However they will not be able to refinance the debts on the Western markets, as they would normally do. This situation is putting a strain on the ruble exchange rate and is threatening the Russian financial system in general. This kind of financial troubles, enhanced by panic, often have domino effects on the economy. According to Russia’s major economic web-portal,, a systemic banking crisis has already started in that country: in the first quarter of this year, clients withdrew 1.4% of their cash from Russian banks, while one of the biggest banks will soon need the government’s assistance.

As if to make things worse for Russia on the background of weak oil prices, Putin is contemplating a natural gas war with Ukraine and Europe. Next week, the EU, Russia and Ukraine will hold gas talks in Berlin. According to the Financial Times, the EU’s base case scenario is a complete disruption of gas transit through Ukraine this winter as Russia will likely try to win the war with Ukraine by economic means. However, this will likely deal a devastating blow to the Russian economy.

Why all this madness? Russian leadership’s economic behavior, which is just a derivative of their imperialistic political goals, resembles more and more old Soviet economic policies. German Gref, CEO of Russia’s biggest bank, Sberbank, at an economic forum in Moscow a couple of weeks ago openly talked about economic incompetence of the leadership and was almost hysterical about the effect of the Western sanctions which are bringing Russia back to the 20th century. The ovations, which he received from the audience, were characteristic of the discontent which is growing among the more progressive layers of the country’s society.

By: Ukrainian Credit Union Limited

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