Tags: russia | putin | ruble

Russia Will Stumble, But Recover Like Bull

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Monday, 26 Jan 2015 07:15 AM Current | Bio | Archive

There has been obvious schadenfreude in the Western press as reports of Russia’s economic demise flood the newspapers and airwaves. Bank runs, inflation, recession, currency collapse, even economic collapse have been the normal fare.

As Einstein said, It’s all relative. Yes, these things have happened or are going to happen to some degree, just not to the extent the West hopes. The news of Russia’s death has been greatly exaggerated.

First let’s start with the price of oil. Yes, Russia counts on crude oil revenue for approximately half its federal revenue. Thousands of Russian jobs depend on the industry as well.

The ripple effect of the price of crude cascades through the heavily oil-dependent Russian economy. However, there is a silver lining to this story. Along with the price of oil falling drastically, the ruble/dollar exchange rate has fallen even further.

Putin sells his oil in dollars; so the drastically different exchange rate has softened the effect of crude’s price decline on the Russian federal budget. Increased federal spending for defense will continue. Social spending will continue. There will be some cuts but they will not be draconian. Russians will tighten their belts as only a Russian can; i.e., hoard the buckwheat!

Second — how about those sanctions? Aren’t they strangling the Russian economy? The main consequence of the sanctions is to prevent Russian banks and corporations from acquiring long-term financing from the West.

Many state-owned entities have large foreign currency debts that need to be rolled over near-term. This has been a thorn in the Kremlin’s side but it is hardly a death blow.

Moscow has shown a willingness to provide dollar financing from its hoard of foreign currency reserves, with an estimated just over $400 billion remaining after recent attempts to shore-up the ruble. The recent indirect central bank financing for state-owned oil producer Rosneft is an example.

George Friedman of Stratfor commented recently on the sanctions after a trip to Moscow, "They are designed to cause pain that the West could not withstand." Applied to others, the effects may vary.

If there is one thing the Russians can do very well, it is to endure hardship. They are taking the subway more, eating out less, and hoarding staples.

However, so far, there has not been substantial hardship. The malls are filled with people shopping. Inflation is present — things cost more — but there is not wholescale panic or desperation. However, Russia is already in recession and the next 12-18 months will be critical.

With higher interest rates imposed recently by the central bank to stem the rubles slide, the housing market will be harder for ordinary Russians to access.

I detected a whiff of panic when the ruble hit 80 to the dollar recently but the government and the central bank have stepped in to calm the public and the markets.

The Kremlin has used approximately $500 million of foreign currency reserves to bailout Trust Bank and is looking for an investor to take over the bank. Moscow has also ordered state-owned corporations to reduce foreign currency holdings and buy rubles.

The central bank has installed monitors at the foreign exchange trading desks of the major banks to see who is buying and selling the Russian currency. This is in effect a soft form of capital controls, achieving the desired effect without spooking the markets. The effort seems to be working as the ruble touched 52 to the dollar but has since weakened somewhat. There most likely will be more bank failures but so far, it seems Moscow has the cash to handle the situation.

There are also optimistic signs for Russia on the geopolitical horizon. Europe is stagnant and can’t grow. Angela Merkel so far has been able to cobble together enough support for sanctions against Moscow for their behavior in Ukraine.

However, as Europe sinks deeper economically, there will be increased pressure to regain access to the lucrative Russian market. Austria and France specifically have voiced this viewpoint recently. It seems unrealistic to believe that Europe can hold its sanctions regime in place for a long period of time considering their economic desperation, much less add to the consequences for Russia.

In the medium term, oil will likely rebound as American rigs are taken offline in the oil shale fields, as has happened in every past crude oil downside price shock. Russia will rebound as well.

President Putin has made it his hallmark to provide stability and grow the standard of living for ordinary Russians, while taking care of his oligarch circle of friends.

Putin and Russia will come out of this crisis and he will come out stronger than before, with an enhanced hatred of the West. His approval rating will stay above 80 percent. The Russian military will grow in strength and lethality. Europe will continue to stagnate.

How America confronts Putin’s agenda will depend on the next election but contrary to the Western media’s feeding frenzy, Putin is going nowhere. If you want further evidence of this fact, China recently signaled its willingness to support Russia through this conflict as needed. Enough said.

L. Todd Wood is a former USAF special operations helicopter pilot. He flew for the 20th Special Operations Squadron and supported SEAL Team 6 and Delta Force in counterterrorism missions. His first novel, “Currency," deals with the geopolitical consequences of overwhelming sovereign debt. Wood writes for The New York Post, Fox Business, The Moscow Times, Breitbart, National Review, and Zero Hedge. He splits his time between New York and Moscow. For more of his reports, Go Here Now.

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ToddWood
Putin and Russia will come out of this crisis and he will come out stronger than before, with an enhanced hatred of the West.
russia, putin, ruble
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2015-15-26
Monday, 26 Jan 2015 07:15 AM
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