Russia Faces The Perfect Storm As Economic Crisis Grows

Russia remains in the headlines again, but no due to President Putin’s outrageous actions or aggressive stances but the country is standing on the edge of the abyss as the worse financial crisis to hit the Eurasian country in many years unfolds.  The 8th largest economy is in a state of turmoil right now.  The shocking collapse of the oil market has hit a lot of countries really hard, but very few nations are as dependent on energy production as Russia is.  Sales of oil and natural gas account for approximately two-thirds of all Russian exports and approximately 50 percent of all government revenue. Crude oil is trading at 56.88 up a few dollars over the past two days, which is helping the ruble stabilize a bit. So far this year, the Russian ruble has fallen nearly 50 percent against the U.S. dollar.  That is a monumental shift.  And as the collapse of the ruble has accelerated in recent days, we are seeing scenes in Russia that are reminiscent of the Weimar Republic.

In a dramatic attempt to stop the downward spiral, the Central Bank of Russia made an astounding move it raised its key interest rate from 10.5 percent all the

way up to 17 percent.  The prime reason for the free-fall of the ruble is the fact that the Central Bank of Russia just printed up about 625 billion rubles and gave it to their friends at Rosneft. Rosneft is an absolutely massive oil company that is controlled by the Russian government.  For months, Rosneft has been asking for a bailout to refinance loans that can no longer be rolled over with western banks because of economic sanctions.  In an attempt to quietly slip this massive injection of new money past everyone, Rosneft issued 625 billion rubles worth of new bonds just before the weekend and the Central Bank of Russia gobbled most of those new bonds up with freshly created money.

Rosneft issued 625 billion rubles, about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue. When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank.

The White House said Tuesday that President Obama would sign a bill allowing additional sanctions against Moscow, as officials warned that Russia’s economy is on the “brink of crisis.” “If I were chairman of President Putin’s council of economic advisers, I would be extremely concerned,” Jason Furman, who holds that position in the Obama administration, told reporters at the White House.

The new sanctions legislation comes as the value of Russia’s currency, the ruble, has collapsed in recent weeks alongside a dramatic fall in the price of oil, Russia’s top export. A year ago, Russia’s economy was growing by about 1.5% and President Vladimir Putin was preparing to host the Sochi Winter Olympics.

Russia is facing the perfect storm, which would have been unpredictable by Vladimir Putin when he began meddling in the Ukraine.  Putin had left the Russia economy to dependent on oil and gas production as the world clamored for more production.  With oil revenues keeping the government and friends of Putin flowing in cash no one paid much attention. Next along came Western sanctions after Putin pushed his way into the Ukraine. After months of largely symbolic sanctions aimed at Russian officials — including asset freezes and travel bans — first the U.S., then Europe, were stung into serious action by the shooting down of a Malaysian airliner over eastern Ukraine in June, and Moscow’s continued support for rebels blamed for the crash.

They took measures to prevent Russia’s biggest banks and companies raising funds in the West, and targeted the country’s key energy and weapons industries with restrictions. Who could have ever foreseen the global oil markets collapsing as the Saudi’s initiated their own war against US producers.