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Sorry, Putin. Russias economy isdoomed

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A By Matt O'BrienDecember 15 at 6:3 PM

A funny thing happened on the way to Vladimir Putin running strategic laps around

the West. Russia's economy imploded.

The latest news is that Russia's central bank raised interest rates from 1.! to 1"percentat an emergency 1 a.m. meeting in an attempt to stop the ruble# which is down

! percent on the year against the dollar# from falling any further. $t's a desperate

mo%e to sa%e Russia's currency that comes at the cost of sacrificing Russia's economy.

&ut e%en that wasn't enough. After a brief rally# the ruble resumed its cliffdi%ing ways

on Tuesday# falling another 1( percent to a low of ) rubles per dollar. $t was * rubles

per dollar +ust the day before. The problem is simple. ,il is still falling# and ordinaryRussians don't want to hold their money in rubles e%en if they get paid 1" percent

interest to do so. $n other words# there's a well+ustified panic. -o now Russia is left

with the double whammy of a collapsing currency and eorbitant interest rates.

/heckmate.

http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/15/russias-economy-is-doomed-its-that-simple/?hpid=z1http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/15/russias-economy-is-doomed-its-that-simple/?hpid=z1http://www.washingtonpost.com/people/matt-obrienhttp://www.cbr.ru/press/pr.aspx?file=16122014_004533dkp2014-12-16T00_39_23.htmhttp://www.cbr.ru/press/pr.aspx?file=16122014_004533dkp2014-12-16T00_39_23.htmhttp://a4166fc5c8de2e956be1-35bf222e249f267a2d3dc4447ed58798.r20.cf3.rackcdn.com/washingtonpost.jpghttps://images-blogger-opensocial.googleusercontent.com/gadgets/proxy?url=http%3A%2F%2Fwww.washingtonpost.com%2Fwp-apps%2Fimrs.php%3Fsrc%3Dhttp%3A%2F%2Fimg.washingtonpost.com%2Frf%2Fimage_908w%2F2010-2019%2FWires%2FImages%2F2014-11-18%2FBloomberg%2F04494502.jpg%26w%3D1484&container=blogger&gadget=a&rewriteMime=image%2F*http://www.washingtonpost.com/people/matt-obrienhttp://www.cbr.ru/press/pr.aspx?file=16122014_004533dkp2014-12-16T00_39_23.htmhttp://www.cbr.ru/press/pr.aspx?file=16122014_004533dkp2014-12-16T00_39_23.htmhttp://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/15/russias-economy-is-doomed-its-that-simple/?hpid=z1http://www.washingtonpost.com/blogs/wonkblog/wp/2014/12/15/russias-economy-is-doomed-its-that-simple/?hpid=z1

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$t's a classic kind of emerging markets crisis. $t's only a small simplification# you see# to

say that Russia doesn't so much ha%e an economy as it has an oil eporting business

that subsidi0es e%erything else. That's why the combination of more supply from the

nited -tates# and less demand from 2urope# /hina# and 3apan has hit them

particularly hard. /heaper oil means Russian companies ha%e fewer dollars to turn

into rubles# which is +ust another way of saying that there's less demand for rubles4so

its price is falling. $t hasn't helped# of course# that sanctions o%er Russia's incursion

into kraine ha%e already left Russia short on dollars.

Add it all up# and the ruble has fallen something like 55 percent against the dollar the

past month# with 11 percent of that coming on 6onday alone. As you can see below#

the Russian ruble has fallen e%en further than the krainian hry%nia or &rent oil hasthis year. The only asset# and $ use that word lightly# that's doneworse than the ruble's

! percent fallis &itcoin# which is a fake currency that technoutopians insist is the

future we don't know we want.

http://qz.com/312598/bitcoin-is-the-worst-investment-of-2014/?utm_content=bufferf3548&utm_medium=social&utm_source=twitter.com&utm_campaign=bufferhttp://qz.com/312598/bitcoin-is-the-worst-investment-of-2014/?utm_content=bufferf3548&utm_medium=social&utm_source=twitter.com&utm_campaign=bufferhttp://qz.com/312598/bitcoin-is-the-worst-investment-of-2014/?utm_content=bufferf3548&utm_medium=social&utm_source=twitter.com&utm_campaign=bufferhttp://qz.com/312598/bitcoin-is-the-worst-investment-of-2014/?utm_content=bufferf3548&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

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-ource7 &loomberg

And this is only going to get worse. Russia# you see# is stuck in an economic catch55.

$ts economy needs lower interest rates to push up growth# but its companies need

higher interest rates to push up the ruble and make all the dollars they borrowed not

worth so much. -o# to use a technical term# they're screwed no matter what they do. $f

they had kept interest rates low# then the ruble would ha%e continued to disintegrate#

inflation would ha%e spiked# andbig corporations would ha%e defaulted4but at least

growth wouldn't ha%e fallen 8uite so much.

$nstead# Russia has opted for the financial shockandawe of raising rates from 1.! to

1" percent in one fell swoop. Rates that high will send Russia's moribund economy into

a deep recession4its central bank already estimates its economy will contract (.! to(." percentif oil stays at 9*abarrel4but they ha%en't been enough to stop the

ruble's free fall. Russia might ha%e to resort to capital controls to prop up the %alue of

the ruble now# and might e%en ha%e to ask the $6: for a bailout# too.

Putin's Russia# like the --R before it# is only as strong as the price of oil. $n the 1;"s#

we made the mistake of thinking that the --R's in%asion of Afghanistan meant we

were losing the /old War# when the reality was that they had stumbled into their ownVietnam and could only afford to feed their people as long as oil stayed skyhigh. The

--R's economic mirage# though# became apparent to e%erybody4none less than their

own people# who had to scrounge in empty supermarkets4after oil prices bottomed

out in the 1;)s. That history is repeating itself now# +ust without the 6arism

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falling currency saying e%erything will be good in the end. >Reuters?

Matt O'Brien is a re!orter "or #on$b%o& coerin& economic

a(airs. )e *as !reious%y a senior associate editor at +e

-t%antic.

Posted by Tha%am

http://www.blogger.com/profile/01338571660162781025http://www.washingtonpost.com/people/matt-obrienhttp://www.blogger.com/profile/01338571660162781025