Cees Bruggemans: As Russia disappears down a sinkhole, what’s Putin’s next move?

By Cees Bruggemans

oilRussia is in free fall, as if disappearing down a sinkhole in slow motion.

It is due to a combination of collapsing oil (energy being the main prop under its economy, which produces little of commercial worth in its own right, with oil and gas amounting to 70% of its exports) and having acquired polecat status through its warlike actions these past 18 months (thus denying it access to Western capital markets in its hour of dire need).

The smart money left sometime ago with the Rouble still below 35:$ this June, but with the Rouble piercing 70:$ yesterday (apparently heading for 100:$), as the Russian foreign reserves have been melting away, from over $500bn to below $400bn in a matter of months.

It has been known for some time that Russian banks and corporates will not be able to refinance in Western debts markets any time soon their outstanding foreign currency debts of some $600bn.

This has fired a desperate search among Russian banks and corporates for hard currency to meet their foreign obligations, with Russia’s own forex reserves the obvious main source.

The Russian central bank has been slowly raising interest rates while allowing its flexible Rouble to take the pressure, until Monday night when clearly decision time had arrived. In a move reminiscent of SARB Governor Stals in 1998, the Russian central bank rate was jacked by 6.5%, from 10.5% to 17%.

No doubt praying that this would be enough to arrest the Rouble’s free fall, stop the capital flight, stabilise inflation expectations. The Rouble did bounce, only to resume its collapse.

Though these desperate actions may serve as short term circuit breakers, they don’t address the fundamental problem, nor can they. Central banks don’t do geopolitical war, nor can middling central banks control the global oil price.

Speculation of imminent capital controls is rife, but so far denied by their economics ministry. Time will tell. Instead, Russian state companies are reportedly being told to sell Dollar assets and repatriate the proceeds. That is part of a fortress Russia mentality, but also seeks less exposure to foreign sensure, if at a frightful economic cost by undoing advantageous global integration at its own expense.

Digging in for worse to come?

One wonders whether Putin realizes that he is doing exactly what the West expects him to do, worsening his home situation and progressively weakening his dealing hand.

The outlook for Russia is a contracting GDP next year, possibly of the order of 4%-5%, but this is clearly a moving target. It depends, doesn’t it, on what happens next? And that isn’t quite clear yet. So dotted-line forecasts are recommended for the time being as we await the next move.

As far as I recall, none of this was predicted last January. But then most global commercial institutions don’t do war, they merely register them, especially when not in their own backyard. One wonders about this one, though.

Last time Russia got into trouble (1998), it suddenly defaulted on some external debt, to the utter surprise of some holders. It was the easy way out.

What would be the easy way out now? Become a model global citizen and leave Ukraine alone, while giving back Crimea (to the Tartars?). Not very likely, right?

Cut Russian oil production by a third (or 3 million b/d), the extent of the US fracking addition to global supply since 2011, creating a new global shortfall, and hoping the price would rise back above $100, with a Phoenix-like Rouble revival?

Not entirely implausible, with someone like Putin, but it would worsen Russian troubles yet more while saving the hides of other oil brethren (for Russian oil volumes would be down a third, making the medicine far worse than the illness).

Instead, take someone else’s oil supply out, or badly degrade it by a couple of million b/d? In war mode, nothing would presumably be beyond the pale. As Putin hardly could take out the American fracking supply, the obvious candidate would be Saudi (one big bite out of its 10 million b/d supply). Alternatively take a few small bites out of Iraq’s, Libya, whoever is close and comes in dandy.

It may not happen. Then again, I thought I was already finished with 2014 but it wasn’t quite finished with me.

A full blown mega-oil shock as we flirt with $60 (indeed sliced through to $59 yesterday). An increasingly nasty nuclear power going down its own sinkhole. A possible financial market debt rupture to follow. Spreading Emerging Market (EM)  contagion as there is increasing differentiation between “good” EM risks (resilient South Korea, Taiwan, Poland, Czech Republic, all more developed & diversified) and “Fragiles” (high inflation, current account & budget deficits, and narrow industrial bases, commodity export dependent).

It implies heightened currency & financial market risk for Fragiles, as much from the Fed prospect (yet to be tempered) as from the Russian debacle (yet to reach full intensity)?

Our 2015 isn’t quite going to start according script. Instead, bring your suntan lotion against sunburn and other eventualities (cream, lots of cream). AMCU, Numsa, EFF & Eskom are as nothing to what could be burning on the stake next.

Which should suspend forecasting for a bit, for it can only make us look silly. Thank goodness summer is here, allowing most voices to go quiet. But come January 12 they will be back in the frontline. And then what?

* Cees Bruggemans is the consulting economist at Bruggemans & Associates. His website is at www.bruggemans.co.za and email [email protected]


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