Putin’s Ruble Gamble
The Kremlin cuts rates despite
currency and inflation risks.
From the Wall Street Journal
The Russian Central Bank’s surprise
decision Friday to cut the policy interest rate to 15% from 17% shows that low
oil prices and Western sanctions continue to inflict severe pain on the Russian
economy. The cut comes only a month after December’s 6.5 percentage-point
increase, but the problems that prompted a string of hikes, from 5.5% a year
ago, haven’t abated.
The crisis was precipitated by the
plummeting price of oil, on which the commodity-dependent Russian economy
depends. American and European sanctions restricting Russians’ access to
foreign exchange compound the pressure. The ruble has lost more than half its
value against the dollar over the past year, and it slid further immediately
after Friday’s announcement.
The central bank claims recent inflation
will prove temporary and that financial markets have now stabilized, meaning
Russia can afford the risks of a rate cut. We’ll see about that. Inflation rose
to 13.1% year-on-year in January from 11.4% in December, and preliminary data
released Friday pegged growth in 2014 at 0.6%, down from 1.3% in 2013.
More fundamentally, the Kremlin’s
cronyism and corruption have already made the Russian economy a no-go zone.
Standard & Poor’s acknowledged what everyone already knew when it
downgraded Moscow’s debt to junk last week, and the other two main credit
agencies peg it at barely investment grade. More than $150 billion left Russia
last year, double the total for 2013.
Capital Economics estimates the
bad-loan ratio could increase to as high as 12.5% of total loans from 6.6%
today. Were that to happen, banks might require a capital injection of up to
$35.6 billion, a sum equal to 5% of GDP, to meet regulatory capital levels.
This would come after the falling oil price already deprived the Kremlin of
some $180 billion in revenue.
The central bank’s rate cut suggests
that Vladimir Putin is
desperate to maintain the semblance of a growing economy, whatever the currency
and inflation risks. That’s a major gamble—and an opportunity for the West if
it will tighten sanctions while Russia continues to press its offensive in
Ukraine. Geopolitical gifts don’t often fall into the laps of Western leaders,
especially when dealing with ambitious autocrats. This is one to seize.
There are 8 comments.
NewestOldestReader Recommended
Dan Shuman 5 hours ago
One of Obama's many weaknesses is
his lack of ability to recognize opportunity. I doubt he'll surprise us now.
James B Shaffer 6 hours ago
Don't hold your breath waiting for
"old lead from behind" to do anything to hurt Putin.
Christopher Holland 7 hours ago
The best time to kick a thug like
Putin is when he is down. He does that himself, the only thing he understands
is callous, brutal, systematic thuggery. Put the boot into him now and keep it
up until he crawls back under the rock he came from
Poster’s comment:
This story is about one way that wars start. The conditions are ripe
this time around.
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