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Russia

“I cannot forecast to you the action of Russia. It is a riddle, wrapped in a mystery, inside an enigma; but perhaps there is a key. That key is Russian national interest.” – Winston Churchill

Hoping to shock the mRussiaarket and to stabilize the Ruble, Russia’s Central Bank made a surprise 1 AM announcement early Tuesday morning, increasing interest rates from 10.5 percent to 17 percent.

The Ruble’s value over the past few days has been characterized by sudden decline. On Monday alone, the currency dropped 11 percent against the dollar, to over 60 Rubles to each American Dollar.

Yet the effect of the the massive interest rate hike can be measured in mere minutes before, as Brent Crude prices again dropped below $60, the Ruble continued its precipitous free fall. With the Ruble approaching 80/1 USD, it has lost over 50 percent of its value over the past year, and today’s news makes it clear that the there is no sign that the currency will stabilize in the near term.

Russia’s currency crisis can be mostly explained due to the country’s reliance on oil, which represents about two-thirds of the country’s exports. To make matters even worse for Russia, the Russian government’s budget requires prices of oil to be over $115 for the budget to remain balanced.

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Compounding these factors are Western sanctions. Russia’s oil companies are heavily indebted and cut off from accessing financing through Western markets. The country’s banks are also cut off from capital markets as well.

For Russia’s economy, it can only get worse. In 2014, the country spent a reported one-fifth of its foreign currency reserves – or $80 billion to prop the Ruble against the sanction regime. Russia’s government is left with few options, but those include currency controls and/or more interest rate hikes.

For those cheering on a Russian default or full-fledged currency crisis, the geopolitical repercussions are unknown. Russia’s contribution to global GDP is in the low single digits according to World Bank figures, exports are negligible outside of oil, and many sectors of the country’s economy are cut off from capital markets, so the crisis’s shockwaves should be limited.

Yet Putin and Russia remain a wildcard as to how they will act and respond. In 1998, during the last currency crisis when Russia had to default Vladimir Putin emerged as a nationalist political force. With Russia posturing with a renewed nationalist vigor, its actions in the coming weeks remain an unknown quantity. This unknown creates an inherent instability in and of itself.

A destabilized Russia isn’t good for anyone.

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