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The top story for this week is the sudden and unexpected shift in Russia’s financial infrastructure, a result of unprecedented monetary policy in the wake of a national currency crisis. In an article released this past Wednesday, Gregg Robb, senior economics reporter for MarketWatch, stated that, “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. Experts weighed in on the hot-button topic, with Andy Kuchins, a senior fellow at the Center for Strategic and International Studies, stating that Putin’s only rational response is to effectively withdraw from Ukraine without appearing weak or incompetent.
Given the acceleration of events, it’s extremely unlikely that any sort of capitulation is in store to quell geopolitical tensions. For one thing, the Russian central bank’s audacity to jump interest rates to 17 percent from an already lofty 10.5 percent, equating to an influx of nearly 90 billion dollars worth of national reserves, has signaled serious intent on the part of the Putin administration to remain unwavering in the face of U.S.-backed sanctions. Unfortunately for average Russian citizens, the Kremlin’s tough talk and even tougher actions have failed to stem a precipitous decline in the ruble, which continues to hit all-time lows against the dollar. Compared to the beginning of this year, the Russian currency has lost over half of its value, prompting herds of panicked citizens to buy up big ticket items, such as cars and home appliances, before prices move any higher.
Russia’s Strategy
Russia’s deputy finance minister, Alexei Moiseyev, was quoted by the Interfax news agency as saying that the government is going to sell foreign currency “as much as necessary and as long as necessary,” a strategy designed to bolster stability in their monetary system by encouraging people to hold onto rubles. Combined with the interest rate hikes, however, such measures are extremely deflationary, leading to a rapid deceleration in business investments and other activities. Andrei Klepach, deputy chairman of the state-owned VEB bank, warned that the country is facing an economic collapse. If Brent crude falls below $60 dollars, the Russian economy could potentially contract by up to five percent, according to a recent report from the Associated Press. In fact, many industry experts blame the volatility in the oil market as the sole driver for Russia’s woes, noting that sanctions are far more symbolic than effective.
Such circumstances may force unpredictable volatility into Russian politics, a sphere long dominated by Putin. As expected, opposition forces have been taking shots at the current administration, while the nation as a whole is getting very little support from OPEC, which agreed somewhat contentiously to maintain the status quo on oil production levels. Rather than this being a slight against Putin, OPEC member nations, particularly Saudi Arabia, have their own vested interest in protecting future market share against competition. Currently, the American shale oil revolution has major implications for OPEC and their recent actions suggest that the Middle East is willing to engage U.S. producers in an economically painful stare-down. The irony for Russia is that the very action that has the least to do with them is imparting the most damage for their country.
Financial News
In financial news, the U.S. equities sector received a major boost, thanks in large part to the technology sector which was led by an upbeat earnings report from software giant Oracle. The benchmark S&P 500 closed Thursday’s session at 2,061, while the Dow Jones added over 421 points to finish up at 17,778. The precious metals sector was soft for much of this week due to selling pressure obstructing an overall rally, with gold closing 5 dollars beneath the 1,200 threshold, while silver is within striking distance of 16 dollars. Palladium dropped back in earlier sessions, but managed to pull up to 792 on the ask. Finally, bitcoin failed another attempt to maintain momentum, with the digital currency falling down to 320 dollars at last count.
And that will do it for this edition. Thanks for watching and we’ll see you next week!