Russian as Fast as I Can

Despite President Vladimir Putin’s militaristic bravado, his economy is in fact Russian… er… rushing… down the tubes. The sanctions, even after taking the reverse retaliatory Russian counter-sanctions into effect, are tanking Russian access to the global financial system, access to reasonably priced insurance, and money is flowing out of Russia by the supertanker load. The currency is heading toward “banana republic worthless.”

“Russia's currency, the ruble, crashed to record lows against the U.S. dollar on [December 16^th], accelerating a months-long selloff. Russia's central bank jacked up interest rates in the middle of the night, desperately trying to stanch the bleeding by enticing investors to keep cash in the country. The bank raised its key rate to 17 percent from 10.5 percent, the biggest hike since Russia's ruble crisis in 1998. If that effort did any good, it was hard to tell.

“The central bank's failure means it will have to keep trying, either by raising rates again or potentially by cracking down on the flow of capital out of the country. Neither option is good, as they can stifle borrowing and economic growth, which was already in deep trouble… Russian GDP might shrink by a terrifying 4.5 percent next year, the central bank said [December 15^th], especially if the price of crude oil hangs around $60 a barrel.” Huffington Post, December 16^th. In fairness, the bank’s moves stabilized the ruble, even sending it up by 9%, but experts wonder how long this stability will last. But there are still signs of panic among Russian residents.

“Russian consumers afraid of losing their savings, as happened in a financial crisis in 1998, flooded stores, rushing to dump rubles that seemed to shrink in worth by the minute… The economy was not yet in danger of freezing in a liquidity crisis, economists and other analysts noted, nor was Russia as yet facing a repeat of 1998, when the government could not pay its debts. But many acknowledged that a financial crisis could develop at lightning speed if global markets that already distrust the Kremlin lost confidence in its ability to contain the damage.” New York Times, December 16^th.

Russian resources are tanking in a global fossil fuel wars. OPEC is making all of its competitors (read: the United States) with high-priced extraction processes (such as costly fracking that has restored the United States to the top of the global oil and gas producing ranks) wither. But why isn’t the United States screaming like a stuck pig?

“Oil traded around $54 a barrel in New York on [December 16^th], after free-falling from nearly $100 a barrel in August. Russia is the world's second-biggest oil exporter after Saudi Arabia. The oil price crash has starved the country of a major source of economic power. Throw in Western sanctions over Putin's adventures in the Crimea and Ukraine, and the Russian economy has ground to a halt… [Screech!]

“Plunging oil prices and economic sanctions have pushed Russia's economy to the brink of collapse. ‘Couldn't happen to a nicer dictator than Vladimir Putin,’ you might be thinking, but it could have repercussions for all of us.” Huffington Post. Yay, so many people are thinking… He’s goin’ down! But knowing how the world is interconnected and given the American “luck” of late, if your are smart, you’d probably want to ask the BIG QUESTION: “What’s the catch? Where the possible blowback?”

But Death-to-Putin fans, the blowback is definitely sitting on the horizon, though perhaps not quite as dangerous as the mess that almost happened back in 1998 when too may American financial institutions were too heavily invested in the ruble, also taking a nasty currency plunge at the time. “The 1998 crisis brought down hedge fund Long Term Capital Management, which shook the entire financial system. The Federal Reserve had to ride to the rescue of LTCM, recruiting banks to bail it out.” Huffington Post. Without that bailout, we could have seen a 2008-like collapse a decade earlier.

The Russian Central Bank has to raise its key rate 150% back then, and matters have not hit that danger level yet. Further, Russia has been barking so long that many investors have avoided that big bad bear for quite a while. But there are European banks with substantial ruble exposure, and the U.S. stock market has been reacting to all the bad news on the Continent. And there are clear signs of panic among Russian residents right now.

Exporters into Russia have been suffering, but it’s big financial institutions we have to watch. The fall of the Russian economy could be so destabilizing so as to trigger another major global recession. The U.S. economy is skating on thin ice, and everyone is waiting for the bubble to burst in China. It actually would not take much to take the global back to those thrilling days of yesteryear … like 2008. Be careful what you wish for.

            I’m Peter Dekom, and the United States simply cannot disconnect from the economic pain of the rest of the world.