A few percent of Russians live in homes they mortgaged with loans denominated in foreign currencies. Their monthly mortgage payments have doubled in the past year.
Imagine that you run a business, such as a clothing store or simple food shop. Today, everything in your store is discounted 10 percent, not because you decided to run a sale, but because the currency is collapsing.
There is a boom in the sales of luxury apartments: people with money don't want to keep it in collapsing rubles, and prefer to invest in real estate.
Buckwheat (kasha), a traditional staple of the Russian diet, shot up more than 50% in November; fresh tomatoes about 35%.
When Putin gave his state of the nation address a couple of weeks ago, he announced that Russia had achieved a bumper harvest of wheat in 2014 ... even so, the price of bread is rising sharply.
Some Russian businesses are reviving a measure from previous economic crises, of pricing their merchandise in "conditional units" (abbreviation u.e.) which are pegged to dollars or euros. In effect, the price is given in dollars, and the merchant demands the amount of rubles to equal that price at the present exchange rate. Under present Russian law, this practice is effectively forbidden ... but some merchants are doing it.
Even before the invasion, we traveled with other couples from Russia. They always seem to travel carrying U.S. dollars rather than rubles or Euros. When Saddam Hussein U.S. dollars. That is respect and to those that flinched in that remark,, you are envious in the face of denial.
The ruble has made a sort of recovery in the past few hours ... if you call a 15% loss in one week, a recovery.
Russia's central bank has accomplished this "rescue" by raising its key interest rate (which functions like the Federal Reserve's key rate in the USA) from 10.5% to 17%, which it decided in an emergency 1 AM meeting this morning.
Jacking up interest rates is a standard tool governments use when trying to defend a falling currency. The theory is very simple: banks offering exceptionally high interest rates are very attractive to investors (if the banks are stable). Anybody wanting to take advantage of Russia's new high rate, must make deposits at Russian banks, in rubles. This increases demand for rubles, and increased demand makes the currency more valuable.
Russia faces two big problems with the move it has just made:
PROBLEM 1 (INEFFECTIVENESS): The currency-boost effect of raising interest rates tends to be short-term. And if the currency is collapsing because of serious economic problems, raising interest rates won't usually solve those problems. If the underlying broken-ness is not fixed, the collapse is likely to continue anyway.
See this Bloomberg article (2 pages): http://goo.gl/fGD1n9
It reviews some examples of past attempts by countries to use interest rates to defend their currency ... sometimes it worked, sometimes it didn't.
In Russia's case, the economy has NEVER been strong. It's a relatively weak economy that is "fortified" by petroleum -- if Russia weren't a petro-state, its economy would be little better (per capita) than Ukraine's. Russia's economy was already slowing dramatically in the second half of 2013, BEFORE its insane war against Ukraine.
Add to this fundamental weakness, the cost of international sanctions. Add to THAT the plummeting price of oil. Russia is a sick man today, and raising rates won't paper that over.
AS I WRITE THIS, LESS THAN 12 HOURS AFTER THE RATE HIKE ... the ruble has decayed again past 65 / USD. Crude oil is continuing to fall, with Urals probably selling at less than USD 60 / bbl. Apparently, Russia's rather desperate rate hike has already failed.
PROBLEM 2 (CONTRACTION): Businesses constantly need to raise cash to cover operating costs and invest in new employees and plant. When bank interest rates are low, the "cost of money" for raising this cash is low, and businesses tend to grow more. When the cost of money rises at high interest rates, business growth slows.
So raising the central bank key rate to 17% is like slamming the brakes on economic growth. For Russia, this is very serious. For months, the most optimistic forecasts for 2015 have called for Russia's GDP growth to be somewhere in the range of +0.5% to -0.5%.
More recently, Russia's central bank forecast about a 4.5% decline in GDP for 2015 if oil is selling at USD 60 / bbl (which could possibly be the average price for most or even all of 2015).
If you also take into account the growth-strangling effect of high interest rates, and that the estimate of capital exported from Russia in 2014 has risen yet again, I guess that Russia might face a GDP loss on the order of 7% in 2015. That's a pretty deep and painful recession (about the size of the 2008-2009 "great recession" in the USA).
So, killing the economy to save the currency ... does that make sense?
See this WaPo blog post: http://goo.gl/Cn78g5
for a summation of how much trouble Russia's economy is in. The dismissive and pessimistic tone may give the appearance of bias, but Matt O'Brien is a very smart reporter on economic issues.
In the past few minutes, the ruble has continued to weaken. It is no better than it was at the close of trading yesterday, and there are still hours to go in Tuesday's trading.