After the close of the markets yesterday, Moscow raised its main interest rate from 10.5% to 17% following a 10% one-day decline in the value of the ruble, its worst drop since 1998. At the time of this alert, the ruble is trading at over 70 rubes to the dollar, now having lost more than half of its value since the start of the year. Troublingly for Moscow, the ruble slide continues, despite what the Financial Times described as a ‘‘‘shock-and-awe‘ bid, implemented in the middle of the night, to stabilize the currency.
It is fair to say that the Russian currency is entering ‘‘‘no man‘s land‘ at this juncture, as none of the market fundamentals underpinning its free-fall have changed ‘‘‘ and no systemic fix is in sight. The Kremlin is trying to protect their remaining hard currency reserves, advertised to be about $430 billion, but that we believe are significantly lower ($400 billion or less).
Fortunately for President Putin, the Russian people still appear to be relatively oblivious to the implications of having their purchasing power for imported consumer goods cut in half, their borrowing costs becoming prohibitively expensive and the corporate and bank debt of weakened institutions being dramatically harder to service. Moreover, even statements emerging from official venues are becoming more dire, such as the Central Bank stating that the economy could shrink by nearly 5% next year, if oil prices average $60 per barrel, and acknowledging that capital flight could rise to as much as $134 billion during the course of this year.
As Russian officials feel increasingly compelled to prepare the public for the harsh realities of the nation‘s economic and financial situation, popular protests become a distinct possibility over the next few weeks and months.