The long winter of Russia’s economic failure

This week Winter came to Russia.

I can’t predict the future of the Russian economy, or what happens when people bereft of buying power turn on a Kleptocracy helmed by a KGB strongman. The brutality of a long winter, and the Malthusian tumult it could bring is something not calculable in advance.

The decline of Russian business
The headline that resounded in digital business circles was that several US companies, in this case Google, now have higher market values than the entirely of the Russian stock market. This factoid sits on top of an amazing moment in global economics which holds unusual risk.

When bankers yell “Run!”
Consider how careful the US Federal Reserve is about raising its interest rate to something appreciably above zero. They’ve talked about it for a year, and this week said they’d be patient about considering it in 2015. That’s how world bankers are, steady, slow and deliberate.

So when Russian bankers met Monday night and decided to raise their interest rate by 6.5% in a surprise move, it was the equivalent to a yelled message in which the only word one can understand is “run”. No further interpretation is needed.

Russia’s central bank is now paying 17% interest to keep currency in Rubles, this is higher than Greece. Yet, in Moscow there are lines around banks to trade rubles for anything else. This panic buying includes a run on hard goods at stores. One may not need six flat screen tvs, but people are trading their cash for them in the hope an attic of electronics will retain value better than Russia’s distrusted currency.

On December 12th, Russian energy giant Rosneft issued an $11 billion ruble bond at a lower yield than government bonds, which Russia’s central bank immediately said it would take as loan provided in quickly inflating rubles. Some see this as a worrying linking of government and corporate debt. Russia now holds near $115 billion in dollar-denominated debt which will fall due before the end of 2015. Russia is paying a higher interest rate than Greece. Can you imagine economic failure in Russia?

Oil and guns
Hydrocarbons contribute over half Russia’s federal budget and two-thirds of it exports. The government owns controlling steaks in energy companies, and holds their debts.

When price of oil fell by almost half in the last six months, the value of the ruble followed oil down. Relative to the dollar, the ruble has lost half its worth. And financial sanctions already in place from its Ukrainian adventures, are limiting access to foreign currency for its firms and government.

Just last week, American politicians agreed to provide the President power to send certain weapons to Ukrainian troops and to impose new sanctions without further votes. President Obama says at the moment no use of these unilateral powers are planned, but this week Canada added sanctions to match other Western nations.

When recounting a year of miscalculations by President Putin, the Wall St. Journal noted the loss of his favorable relationship with Angela Merkel as among his greatest losses. Europe’s most powerful leader has shifted from being Russia’s advocate, to building the EU’s resolve for economic sanctions against it.

What next?
Over time oil prices will recover, but the damage to the Russian economy already done will be long lasting. Putin may reverse direction in the Ukraine to gain access to foreign currency, or he may take increased US involvement as a reason to double down and shift domestic focus toward foreign conflicts.

From a purely economic standpoint, low energy prices should be a clear benefit to world economies. But the uncertainty of a destabilized Russia adds the kind of uncertainty that chills markets.

Nobody knows the tipping point at which the Russian economy fails, or the cultural catalyst for a political power shift. But either could extend this Winter to the world economy. Uncertainty is an export which Russia has in abundance, so the severity, reach and duration of this Russian winter is a concern to the rest of the world too.