Russia’s central bank raised interest rates on Thursday, but the move failed to stop the drop of the rouble as the slide in oil prices continues to put pressure on the currency.
Here is the bigger problem:
Economists said the Bank of Russia faced a conundrum: only decisive rate increases had a chance of reining in inflation and stopping the currency devaluation, but further steep rises risk weighing on an already stagnating economy. In a reflection of this dilemma, analysts’ forecasts ahead of Thursday’s rate decision had ranged from no further increase to a three percentage points rise.
Russia’s economic woes continue with the sanctions announce by the United States and other countries being extended, and the price of oil being well below the $100+ a barrel that Russia had been earning just a year ago.
ReplyDeleteRussia’s engagement in the Ukraine caused the United States to place sanctions and freeze funds of Russian account holders. Yesterday, President Obama announced that those sanctions were going to continue thru 2015. Russia is vowing to hold to its foreign policies and not let those sanctions change their direction in the Ukraine (Reuters, March 4, 2015).
Reuters reported at the end of January 2015 that the sanctions and the lower price of oil could cause the GDP to shrink by more than the 3% government estimate and perhaps be over 5.5%. Russian Economy Minister Alexei Ulyukayev forecasted inflation to be 12% for 2015 (Reuters, January 31, 2015). On January 27, 2015 S&P downgraded Russia’s credit rating to junk status (Reuters, January 27, 2015).
Russia unfortunately has not offered a plan to stabilize the country. Capital is leaving the country as the super elite have been moving money from rubles to other currencies ahead of the devaluation that has been occurring (over 40% devaluation versus the dollar in the past year) (Reuters, January 27, 2015). Foreign investment has dried up because of the sanctions and the inflation raising costs too fast.
Russia, as well as, some other countries that enjoyed the benefits of $120/ barrel prices over the last four years did not put enough of those dollars into other programs to insulate their economy for when the oil boom burst. The political conflicts with the West eliminated some markets for Russia who depended upon a positive trade balance to pay for the future. Russia will have to make some very harsh cuts to some of its spending programs and make peace with the West to reopen markets and capital inflow to stabilize the ruble. The pen may be mightier than the sword, but the wallet trumps both.
Regards,
Karen Whelpley
Work Cited:
Reuters (March 4, 2015). No sanctions would ever force Russia into changing its policy – Kremlin. Web. (March 5, 2015). Retrieved from:http://rt.com/politics/237693-russia-sanctions-futile-peskov/
(January 31, 2015). Russian economy ministry sees 2015 GDP falling 3%. Web. (March 5, 2015). Retrieved from: http://www.theglobeandmail.com/report-on-business/international-business/european-business/russian-economy-ministry-sees-2015-gdp-falling-3/article22733383/
Reuters. (January 27, 2015). S&P downgrades Russia’s sovereign credit rating to ‘junk’. Web. (March 5, 2015). Retrieved from: http://www.theglobeandmail.com/report-on-business/international-business/sp-downgrades-russias-sovereign-credit-rating-to-junk/article22647182/
I don’t think it’s possible now, but in future it can happen and it’s obvious that these banks are what control things, so they can easily manage it. We always need to be aware of these news since we can always find the fall stopping and things taking u-turn, so that’s why we need to be careful. I follow this site while also my broker OctaFX is excellent when it comes to providing all the latest news and updates, so that makes me feel better.
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