Russia risks Soviet-style collapse as rouble defence fails

[superbeets]

Russia has lost control of its economy and may be forced to impose Soviet-style exchange controls after "shock and awe" action by the central bank failed to stem the collapse of the rouble.

“The situation is critical,” said the central bank’s vice-chairman, Sergei Shvetsov. “What is happening is a nightmare that we could not even have imagined a year ago."

The currency crashed to 100 against the euro in the biggest one-day drop since the default crisis in 1998 as capital flight gathered pace, despite a drastic rise in interest rates to 17pc intended to crush speculators and show resolve.

Yields on two-year Russian bonds spiralled to 15.36pc, while credit default swaps are pricing in a one-third chance of a sovereign default. The shares of Russia’s biggest lender, Sberbank, fell 18pc.

Neil Shearing, from Capital Economics, said the spectacular failure of the rate shock may bring matters to a head. “If a rise of 650 basis points won’t do the job, we are near the end. That means stringent capital controls,” he said.

 

[superbeets]

the rouble plunges risk setting off a systemic bank run. “A large-scale run on deposits, once under way, would make capital controls pretty much unavoidable,” he said, adding that the authorities may start by forcing state-controlled companies to sell foreign assets and repatriate funds.
In Washington, the White House said it had no intention of easing pressure on Russia to halt the freefall. "It is president Vladimir Putin's decision to make. The aim is to sharpen the choice that he faces," it said.
President Barack Obama will not veto a law passed by Congress imposing a raft of new sanctions against Russia, even though he warned previously that it goes too far for European leaders and risks splitting the trans-Atlantic front. The measures include $350m of military assistance to Ukraine, and authorize Mr Obama to impose curbs on energy companies investing in Russia, as well as to prohibit credit to Gazprom.

 

[superbeets]

Sergei Lavrov, Russia's foreign minister, said it is now clear that the US aim is to topple Mr Putin through "regime change" but vowed that the Russian people would rise in defiance. “We have been in much worse situations in our history, and every time we have got out of our fix much stronger,” he said.
After years of bluster and suggestions by Mr Putin that the US is a paper tiger, the Kremlin is now coming face to face with the cataclysmic consequences of what it has done by invading Ukraine and changing Europe's borders by force. By the same token, Washington needs to move with care since it would be a geostrategic miscalculation of the first order to push a nuclear-armed Russia too far into a corner, or to perpetuatue a cycle of grievance.



Anthony Peters, from SwissInvest, said Russia's leaders had misled their own people and have until now been in denial about the crisis engulfing them. "Not since Soviet times have we seen such steadfast refusal by the Kremlin to acknowledge the presence of severe political and economic problems while sacrificing the people in the name of orthodoxy. The Russian people are legendarily stoic in the face of hardships but beware if, and when, their patience runs out,” he said.



The rouble crash has doubled the cost of servicing nearly $700bn of external debt owed by Russian banks, companies and state bodies, mostly in dollars. They must repay $30bn this month and a further $100bn next year. Oil giant Rosneft has requested $49bn of state aid to weather the crisis.



Traders in Moscow expressed fury at the central bank’s refusal to deploy its $416bn of foreign reserves to “turbo-charge” the defence of the rouble, though the authorities may have intervened in late trading. The currency clawed back some ground - to 69 against the dollar - after one of the wildest days of the modern era. Eugene Kogan, from Moscow Partners, said the Russian stock market faces “slow death” over the next six months as liquidity vanishes.



It is clear that the authorities are guarding their reserves jealously after burning through $100bn this year to little avail. BNP’s Tatiana Tchembarova said what remains no longer covers external debt, unlike 2008 when there was still ample cover. “In addition to being twice as levered, Russia is entering this crisis with lower reserves,” she said.
The government has already committed $143bn in foreign reserve spending for next year. “We think that more will be required to support Russia’s banking system,” she said. The Kremlin had to spend $170bn rescuing the banks in the 2008-2009 crisis.

 

[superbeets]

Lubomir Mitov, from the Institute of International Finance, said any fall in reserves below $330bn could prove dangerous, given the scale of foreign debt and a confluence of pressures. “It is a perfect storm. Each $10 fall in the price of oil reduces export revenues by some 2pc of GDP. A decline of this magnitude could shift the current account to a 3.5pc deficit,” he said. The total “financing gap” could soon reach 10pc of GDP due to the combined effects of capital flight and sanctions.



The central bank knows that Russia’s seemingly large reserves are a Maginot Line. Yet its attempt to defend the rouble only by raising rates is itself lethal. Even before the latest move it warned that the economy could contract by 4.7pc next year in a scenario of $60 oil prices.



The slump may now be far worse as a violent monetary squeeze sends tremors through the banking system and sets off a wave of corporate bankruptcies. BNP Paribas said each 100-point rise in rates cuts 0.8pc off GDP a year later. Rates have risen 750 points in a week.



Lars Christensen, from Danske Bank, said the Kremlin’s actions have led to the “absolutely worst possible outcome” since the botched move is enough to do grave damage, without solving anything. “They should have let the currency go rather than killing the economy. Investment is in freefall, and I fear this shock is going to be even bigger than in 2008-2009. Nothing suggests that oil is going to rebound quickly this time,” he said.



Growth has held up over recent months but this may be an illusion of the crisis itself as people scramble to rid themselves of roubles to buy homes, cars, washing machines or anything that keeps its value. Ikea has seen a surge of orders for new kitchens. This is a one-off effect, and creates a cliff-edge from the economy next year.

 

[superbeets]

The rouble trauma came as premier Dmitry Medvedev held an emergency meeting with economic planners, and rumours swirled of a sweeping purge at the top of Kremlin. Officials denied there were any plans for capital controls after the meeting.



There is no sign yet of relief from the oil markets. Brent crude fell below $59 a barrel on Tuesday for the first time since the depths of the Great Recession in 2009. The fallout from the crisis is already hitting banks linked to Russia and Ukraine. The share price of Austria’s Raiffeisen fell 8pc in Vienna. More than 240pc of its tangible equity is exposed to the region. The biggest external lender is France’s Societe Generale, with €25bn of exposure, or 62pc of tangible equity.



Contagion is spreading across the emerging market nexus, hitting countries such as Turkey and India that should be beneficiaries of lower oil prices. “There is absolutely no liquidity anywhere. The system is stressed and we have a crunch all over the place,” said one hedge fund trader.



There are signs that the sell-off is becoming self-feeding as investors withdraw money from emerging market bond funds, forcing the funds to liquidate holdings into the downturn. In some cases managers are acting tactically, selling “proxies” such as Turkish debt given the difficulty of exiting Russian positions.



The rouble has now fallen 56pc against the dollar over the past year. Russian GDP has shrunk to $1.1 trillion, smaller than the economy of Texas, and half the size of Italy’s. The effect has been to double Russia’s external debt to at least 70pc of GDP, a high-risk level for rating agencies.




“A Russian downgrade to junk is only a matter or time,” said Tim Ash, from Standard Bank.

 

[Ricboff]

'The rouble has now fallen 56pc against the dollar over the past year. Russian GDP has shrunk to $1.1 trillion, smaller than the economy of Texas, and half the size of Italy’s. The effect has been to double Russia’s external debt to at least 70pc of GDP, a high-risk level for rating agencies.




“A Russian downgrade to junk is only a matter or time,” said Tim Ash, from Standard Bank'


......... There's no hole to go hiding, Mr.Putin. How's those deltoids? still undefined, tough guy?

http://www.marketwatch.com/story/pu...ne-to-stem-crisis-2014-12-16?dist=tbeforebell


Vladimir Putin has little choice but to withdraw from eastern Ukraine in order to stem the financial crisis that is spinning out of control in his country.Western sanctions, the drop in oil prices, and crony capitalism in Russia have combined to create a “perfect storm” in Russian financial markets.
Dramatic efforts by the Russian central bank to stop the falling ruble have so far failed. It has revived memories of the 1998 financial crisis.
“What can Putin do? He can’t reform [the economy.] He’s stuck. The only think he can do is to stop the financial sanctions by withdrawing from eastern Ukraine,” said Anders Aslund, a senior fellow at the Peterson Institute.
Andy Kuchins, a senior fellow at the Center for Strategic and International Studies, agreed that Putin’s “only rational response” would be to find some face-saving way to withdraw from eastern Ukraine.
It was certainly a possibility that Putin would respond aggressively by increasing his activities in Ukraine “or even elsewhere.”



....let's hope the little guy doesn't start blowing up the planet.....



and fresh off the presses.......

http://www.reuters.com/article/2014/12/16/us-russia-rouble-kerry-idUSKBN0JU1UC20141216

Russia has made constructive moves in recent days towards reducing tensions in Ukraine, U.S. Secretary of State John Kerry said on Tuesday, and he raised the possibility that Washington could lift sanctions if Moscow keeps taking positive steps.

Speaking in London, Kerry said the United States and Europe could lift sanctions within days or weeks if President Vladimir Putin keeps taking steps to ease tensions and lives up to commitments under ceasefire accords to end the Ukraine conflict.
"These sanctions could be lifted in a matter of weeks or days, depending on the choices that President Putin takes," Kerry told reporters.
"Their sole purpose here is to restore the international norm with respect to behavior between nations," to ensure respect for borders, sovereignty and rights, he said.










checkmate

 

[PatsFan1283]

No wonder Prokorhov is looking to unload contracts and sell the Nets as fast as he can for a nice profit

 

[superbeets]

 

[superbeets]

 

[HamGlaze]

Wow, that didn't take long for Russia to tank. Can't they just ride the market out? What have they done with all that money they've been raking in over these high oil price years..


At this rate the Russian people will riot and retaliate against the former most popular man in Russia just a few months ago.

 

[PatsFan1283]

Wow, that didn't take long for Russia to tank. Can't they just ride the market out? What have they done with all that money they've been raking in over these high oil price years..


At this rate the Russian people will riot and retaliate against the former most popular man in Russia just a few months ago.

Depends how long there is supply glut. It seems like Saudi Arabia is willing to ride out lower prices for a little while even though they depend on $100 oil for their budgets as well.

Something like 1/2 their GDP comes from oil, just no diversification amongst industry at all. They probably can't ride it out without some social unrest. Nor can Venezuala.

 

[Dafinch]

Where are all those wise guys who were crowing about him kicking Obama's ass? I guess those pesky 'ole sanctions weren't totally ineffective, were they?

 

[brucefan]

A prelude to what's coming here. Should be fun watching Yellen rip rates up to 17%

 

[superbeets]

The west knows all about the vulnerability of Russia’s economy, its creaking factories and its over-reliance on the energy sector. When the introduction of sanctions over Russia’s support for the separatists in Ukraine failed to bring Vladimir Putin to heel, the US and Saudi Arabia decided to hurt Russia by driving down oil prices. Both countries will face some collateral damage as a result – and this could be considerable in the case of the US shale sector – but both were prepared to take the risk on the grounds that Russia would suffer much more pain. This has proved to be true.




Now for the good (or perhaps less bad) news. Eventually, lower oil prices mean stronger global growth, because consumers will have more money to spend and businesses will have more spare cash to invest. At that point, the price of oil will rise and the rouble with it.




Even so, Russia looks vulnerable. It has reached the end of the road with interest rate increases and has only two options: to allow the rouble to find its own level, in the hope that declining oil prices will prove temporary or to introduce capital controls. These are seen very much as a last resort by Moscow, but may prove necessary if the rouble rout continues.




The phrase “perfect storm” is over-used, but the combination of a collapsing currency, a collapsing economy and punitive interest rates make it apposite. The question now is how Putin responds. If he softens his line over Ukraine, the west’s gamble will have paid off and it will be mission accomplished. But there are hardliners in Moscow who will argue that the response to the crisis should be a siege economy and the ratcheting up of military pressure on Ukraine. If economic agony makes a wounded Russian bear more belligerent, it will prove a hollow victory.

 

[superbeets]

Putin's news conference is minutes away. Lets see what he has to say.

 

[superbeets]

Economy will rebound 'within two years'

Our economy will overcome the current situation. How long will it take? I believe about two years in the worst situation.



Putin says mortality has fallen and the birth rate is up, which he says is a good thing.

We have paid a lot of time this year to increasing the combat capacity of our forces.
​

Putin responds to question on 'new cold war'

A question from the BBC’s John Simpson, the first in English. Putin requests headphones so he can understand the question.
Western countries believe almost universally that there’s a new cold war and you’ve decided to create that, says Simpson. There are daily manoeuvres by Russian aircraft towards western airspace. You must have decided to do that as well as the incursion into Ukraine. Now you need help from the west because of your currency. Will you say you have no desire for a cold war and you will do what you can to sort out the stiuation in Ukraine?
The president says Russia has contributed to tension but the only thing we’ve done is defended our interests. We are not attacking anyone, encroaching upon anyone else’s interests. It is not the manoeuvres that provoke tension.
Russian stopped strategic bomber flights in the early 90s but the US continued flights of aircraft with nuclear warheads. Who provoked who?
We only have two military bases abroad in the interests of defending ourselves while the US have military bases all over the world, but it is Russia that is being aggressive?
The Pentagon’s budget is 10 times that of Russia’s defence spend but you are saying we are aggressive. Is that logical?

Does anyone listen to us at all?
​

The US is employing its ABMs (anti-ballistic missiles) in Europe on our borders and we are the ones pursuing an aggressive policy?

I believe that we are right in the course of the Ukrainian crisis ...and our western partners are wrong.
There have been sanctions introduced against Russia in a completely illegitimate and illegal way.
We will work together if our partners want to cooperate with us.




Next question, from Reuters, the first from western media, is how sure are you of your circle that you will have its support always. How high are the risks of a coup d’etat in Russia?
Putin says

Do not be afraid.
​

There can be no overthrow of palaces because there are no palaces.
The president says he has support on domestic and foreign policy from the people because they know he is acting in their “overwhelming interests”.
​

 

[superbeets]

[h=1]'The Russian Bear must eat berries, but he can't if his fangs and claws have been torn out': Defiant Putin takes swipe at West over Ukraine... but his vows to fix Russia's nosediving economy fail to stop the slide[/h]

• Bullish Putin uses annual speech to attack the West and its leaders
• Said no-one cares about Ukraine and used it as an excuse to punish him
• Blamed Ukrainian crisis on former president refusing to use force
• Attempts to reassure Russian markets backfired as rouble dropped again
• Said he would take 'two years' to fix economy, without revealing how

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Vladimir Putin has taken a swipe at the West during his end-of-year speech in Moscow today, saying leasers want to put the Russian bear 'in chains' and 'remove its fangs and its claws'

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Putin also tried to restore calm to the economy the falling price of oil and gas, along with Western sanctions and investor panic, lead to a currency meltdown two days ago

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A defiant Putin hit back today, saying sanctions were only 25 to 30 per cent to blame for the crash, and adding that it will take two years to fix the issue 'at most'

 

[superbeets]

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Speaking in Moscow Putin also hit out at Western leaders, saying they did not care about Ukraine, but had used the situation there as a way to punish Russia

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Speaking with real emotion Putin said that the West sought to put the Russian bear 'in a chain' in order to 'rip out its fangs and claws' - referring to the country's nuclear weapons

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Meanwhile outside the TV studios police haul away a protester who was planning on heckling at the event

 

[superbeets]

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Putin admitted some decision by the Russian Central Bank were made too late. The move to hike interest rates two days ago sparked the current crisis after it caused investors to panic

 

[SheriffJoe]