HOORAY!!! BIG WIN FOR RUSSIA!!!! RUSSIA IS NUMBER ONE!!!!!
Yes, Russia has made a new world-class distinction for itself! Russians can walk the streets with their heads held a little higher, their chests a little bigger, a little more "strut" in their stride.
Russia's ruble is now the most calamitously unstable, of all the world's major currencies.
Until a couple of weeks ago, Argentina's peso (ARS) was the "sick man" of currency. Argentina's economy is modest in size (less than one third of Russia's) with weak growth during the past year. The Argentine government has struggled to pay its bills, culminating in a default of sovereign debt a couple of months ago.
Not surprisingly, under these circumstances, the Argentine peso has lost 23.31 percent of its value against the USD since January 1.
But Russia, hating to be thought of as an inferior, second-rate country, has said to Argentina: "Ha!!!!!! You think you can trash your currency better than Russians can? We'll show you, damn your eyes!"
As of this writing, the ruble has lost 23.80 percent of its value against USD since January 1.
That's right, gentlemen. If at the start of 2014, a Russian had used all of his ruble-denominated savings to buy Argentine pesos, his savings would be worth more today, than the rubles he traded.
Way to go, Russia. The world is carefully studying your conduct -- we are sure you will set many such splendid examples.
For a couple of weeks, the severe decline in the ruble was linked to falling petroleum prices: oil is Russia's dominant export, accounts for about half the federal budget, and is a big chunk of Russia's GDP (and the main cause of Russia's "growth" since Putin took power).
However, crude oil leveled out almost a week ago, but the ruble is now falling even faster than before! What's up?
A QUICK CURRENCY PRIMER
The dominant currencies of the world (USD and Euro) float freely -- that is, their exchange rates are set by markets (supply and demand). The huge economies behind these currencies can weather fluctuations in exchange rates, and those fluctuations usually aren't bad BECAUSE the economies are strong.
Smaller, less confident economies often make currency interventions to achieve exchange rates different from what the market would set. Most of the time, they are artificially pumping up the value of their currency, which they do by buying their own money! They have to use major currencies to do this (like dollars and euros), which of course they can't print themselves, so they have to buy them, or accumulate them from international trade (selling their products abroad). Essentially, these countries burn up some percentage of their money each year, to keep their currency "high".
Russia tried to do this in 2008 (start of the world recession), and burned up a large portion of its foreign currency reserves. Eventually, the ruble weakened anyway. So Russia decided not to directly control exchange rates anymore, instead making limited ruble buys to even out short-term changes.
Russia has now realized, that limited intervention is the worst of both worlds -- it isn't preventing the ruble from toilet paper, and at the same time is killing the foreign currency reserves (a lot of small ruble-buys cost as much dollar/euro reserves as one big euro buy). Russia has already lost a lot of its reserves.
Another problem with limited intervention, is that it creates opportunity for speculators: they buy falling rubles as the intervention threshold gets near, knowing that if they wait a day or two, Russia will buy them back with dollars and euros. Currency traders can make a good profit doing this, if they time it right. This speculation actually worsens the ruble's decline.
So, people in the currency markets are now expecting that Russia will free-float the currency -- maybe, quite soon.
According to the financial newspapers, it is the prospect of the ruble without any government support that is now powering the ruble's downward slide.
Correction: I meant to write "a lot of small ruble-buys costs as much dollar/euro reserves as one big ruble buy".
Of those brave men who forecast market moves, some are now predicting that the ruble could reach 50/USD in the next few months. Tom Keene, a broadcaster on Bloomberg radio and TV, even mentioned 55!
SUFFERING WILL BE GENERAL
Above, I wrote about the Russian government deciding to free-float the ruble. What I left out, is that Putin worries about his federal budget. If he cared at all about the Russian people, there are a hell of a lot of things he would be doing differently. But he views ordinary Russians with utter contempt: for him, they are commodities to be burned up, like so many tons of coal.
Letting the ruble float is good for Putin's budget, because most of the obligations (commitments to pay) are in rubles! So as rubles become so much toilet paper, federal expenses automatically decline. This way, Putin can buy his tanks, missiles and fighter jets without worry.
On the other side, the Russian people will be bleeding from every orifice (visualize Ebola). Modern Russia is not self-sufficient (or to put it more accurately, it CAN be self-sufficient, but only at a Soviet-era level of grinding poverty). So Russians need LOTS of things from abroad, which are all getting dramatically more expensive. Imagine you're a government worker (and lots of Russians are -- who knew that Putin's paradise was hip-deep in bureaucracy?). Your salary is already crap -- it's a trade-off Russians have accepted, because the low-paying government jobs are more secure. Your small salary now buys a lot less, of luxuries like food.
Even worse, if you are poor -- for example, an elderly person collecting a pension -- your poverty will deepen terribly.
But Putin doesn't care. His homes are warm every winter. He, his mistress, and their small child always have plenty to eat.
EVEN WORSE, FOR THE NEIGHBORS
The "stans" of central Asia are hit very hard by Russia's financial decline. Their economies range from weak to very poor, and are highly intertwined with Russia's. (Partly, this is a legacy of Soviet days when they were a single economy, but also it is Putin's imperialism: he wants to keep them in the Russian vise, and not permit them to engage the rest of the world. THAT IS WHY HE INVADED UKRAINE.)
An important part of their national income is remittances from their nationals who have gone to Russia for work, and send much of their income back to their families. Their ruble-denominated incomes are rapidly shrinking in value.
The currencies of the "stans" are tumbling in parallel with the ruble. When Russia sneezes, they catch cold; when Russia catches cold, they die of pneumonia.
BOTTOM LINE: IT'S ALL ABOUT UKRAINE
Russia as a whole, ordinary Russian people, and the people of central Asia would all be much, much better off, were it not for Putin's needless, mad, cruel, murderous and utterly illegal war against Ukraine.
Many tens of millions are suffering -- and soon will suffer more -- because of the monstrous ego of one narcissistic tyrant.
If Putin decided tomorrow to respect law, honor, and moral decency, everyone's future would be a lot brighter.
The welfare of many tens of millions is in the hands of a single moral cripple.
i dont think russians will see it like that Durak,, take putin out of your scribbles and replace it with the west and their alliances, thev west in their minds will be the "monstrous ego of many narcissistic tyrant's" under one major tyrant, America.
it will take a hell of a lot to change russian minds in their general thought, i think.
there was an opportunity once when putin was looking very shaky at his elections, but not now.
hes russian and knows how they tick, and what makes them go cuckoo on the chime.
you are dealing with russian character now, not putin
we have a term here "MANA"
"Mana" "refers to a person or organisation of people of great personal prestige and character.
how ever we see it, they think they are righteous one way or the other.
they will feel belittled if putin about turns,,, its just russian character in play now.
many were suffering before this, now all the suffers will be able to get together on equal terms and find this common ground again,,,,, and this will be blaming the outside world once again, or more so america.
The exchange rate is not the only result of the pressure on Russia. There is also high internal inflation, I wrote of it in late spring. It is why I do not want to see a gas deal with the west. TO put further pressure on Russia, the gas should flow from Europe to Ukraine. It is imperative that Ukraine's economy be bucked up to so that Ukraine prospers and that will put more internal pressure on Putin. It is a better path than to try and win the "hearts and minds" of the blind and misinformed. There are plenty on each side of the renewed "Iron Curtain" a better name might be the "E-Curtain" (10-29-14)
NATO detected and monitored four groups of Russian military aircraft, conducting significant military maneuvers in European airspace on October 28 and 29, 2014. These sizable Russian flights took place over the Baltic Sea, North Sea/Atlantic Ocean and Black Sea. These activities represent an unusual level of air activity over European airspace. Fighter aircraft from Norway, Britain, Portugal, Germany and Turkey were scrambled in response.
After setting yet another all-time high RUB / USD mark, the ruble strengthened by about 5 percent today, and is now trading in the 41s.
The financial press doesn't have solid data to explain this, but I read some surmises.
First, in recent days ruble trading volumes have been relatively low (both for the abrupt decline and even more abrupt recovery). In such an environment, currency speculators can have an outsize effect on the exchange rate.
Second, Russia's central banking committee meets tomorrow, and apparently some expect help for the ruble. I wrote recently about expectations that Russia will allow the ruble to float freely (see above). However, some are now thinking that instead of the present policy (limited interventions with a retreat after each one), the central bank will make the more traditional strong interventions (really large buys of rubles). The thinking (it is rumored) is that strong intervention may burn less foreign reserves than the present neither-fish-nor-fowl approach.
So, it may be that currency markets are betting on the outcome of the central bank meeting on Friday.
Anyway, the ruble is now doing better in 2014 than the Argentine peso!!!
The ruble is again doing worse than the Argentine peso.
Russia's central banking committee had their big meeting today, and announced what they're going to do about the ruble:
I quote, "".
That's it, nothing. It's back to 43 RUB / USD.
What they DID announce, was a steep jack-up of their base interest rate to 9.5% (remember, this is the rate BANKS pay, businesses and individuals pay a premium on top of that). The idea behind this is to curb Russia's strong inflation, now running about 8%. They also signaled that more rate increases may be coming in the next months.
I only understand .01% of economic theory, but here is why I suspect they are mistaken.
In what we think of as normal economies (US and Europe), inflation is mostly powered by wages rising faster than productivity (when you pay your workers more, you charge more for the product, prices go up, other workers feel pressed to earn more...). Wage growth accelerates when the economy is "hot" -- lots of activity and growth, and nearly full employment. Obviously, when unemployment is high, businesses don't need to pay top dollar (or euro) to hire or retain workers.
So, in these "normal" economies, when inflation gets high, jacking up interest rates slows economic growth (because businesses borrow money from banks to pay for part of their growth, and borrow less when the interest is more expensive) -- and as growth slows, wage pressure goes down, and so does inflation.
Now, Russia's unemployment rate is low (about 5%) but not extreme. As headlines have been telling us, GDP growth is stalled in Russia -- there is even some risk of recession (decline in GDP).
I don't know all the sources of Russia's inflation, but two of them are (a) Putin's stupid embargo on Western food products, and (b) the weakening ruble. Russia's economy is far from self-sufficient, and depends a LOT on imported goods. As they become more expensive, of course average costs are rising!
If I'm right about this, Russia's high interest rates will not get to the root cause of inflation, but WILL slow economic growth -- costly borrowing could be the "last straw" that throws Russia into recession.
It's as though Russia's car needs to turn right, and instead of turning the steering wheel they're jamming on the brakes.
Russia is suffering from a labor shortage, which has been pressing wages upward.
Russia has what economists call demographic problems: a long-term outlook for shrinking population and an increasing percentage of elderly. Combine this with Russia's terrible public health situation, with many millions suffering from chronic illness and drug addiction, and the result is that Russia has an exceptionally low percentage of adults able to participate in the labor force.
The impact of demographics on Russia's economy is what economists call a structural problem. I don't understand how strangling an already miserable economic growth rate, is supposed to help.
Durak : Your definition of inflation is more of a political description and finger pointing. Inflation is a redistribution of income. Someone loses and someone gains. It is not wages that are inflationary in Russia and the redistribution is mostly moving out of Russia.
I don't pretend to be an economist. We are probably reading about economics from different sources.
I didn't actually give a definition of inflation. Instead, I wrote my understanding of how it typically works in the US during recent years. The large economies of the West have serious problems, but excessive inflation is not one of them.
Wages actually are growing in Russia faster than productivity, and it seems reasonable to me that it accounts for _part_ of the present inflation rate.
A few percent of inflation is not a national crisis. I remember when the rate in Israel approached 500 percent. The present inflation Russia will save the government money; increase the misery of those who already poorest; and cause the real value of deposit account balances to stagnate, even though they seem to have handsome interest rates.
One foot has been taken of Putin's neck and it is a sad day. Making a deal with the devil. It is a sell out by Europe with the real threat of abandonment of Ukraine for the expediency of filling a pipeline. I am disgusted by the lack of thought or strength of will and the gutless appeasement of a tyrant.