Don’t expect Russian bear to retreat into its lair

A sharp economic contraction now looms in Russia

A stockbroker’s note arrives from Moscow, a city in the grip of gloom over the rouble’s unnerving decline and a bag other woes. “A full-blown currency and financial crisis scenario seems to be unfolding in Russia in what was supposed to be a quiet week. There is a risk that the economy will come to a sudden stop, along with the banks and the overall financial system,” wrote Slava Smolyaninov, deputy research chief at UralSib Capital, the broking arm of a large Russian bank.

“Hence, we may have underestimated the level of financial risk in the event of a full-fledged panic. A bank run could be in the cards.”

That was Wednesday morning, the day after the rouble had dropped 20 per cent before regaining a little at the tail end of a week-long slide. After increasing prices this month, some car dealerships for snazzy western marques have called a halt to sales. Russians have been buying up white goods and smart phones this week in the hope that they will retain more value than the rouble.

Stockpiling food

The currency has lost almost half its value against the US dollar this year, confidence shattered by a 40 per cent drop in oil prices since June, and by European and US sanctions against the Putin regime’s interference in Ukraine. Capital flight is in train as big investors pull out their money. According to Bloomberg, ordinary Muscovites talk of stockpiling buckwheat.

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In the dead of night on Monday, the central bank hiked interest rates by 6.5 per cent to 17 per cent. This was fruitless, leading the central bank to take steps on Wednesday to shore up the banking system and the finance ministry to sell dollars. The rouble rose 12 per cent, the biggest advance in a single day for 16 years.

“The Russian authorities decided to pull out the entire arsenal to fight off the abnormal volatility and rapid depreciation of the rouble,” said Smolyaninov’s note on Thursday. “Today promises to be another wild ride.”

All of this marks a clear escalation of stakes in the Kremlin’s tense stand-off with Ukraine, already seen as the world’s biggest geopolitical problem.

So what does it all mean for us? Irish direct trade links with Russia are small, although the Kremlin’s ban on European food imports in reprisal for sanctions angered Irish farmers. Viewed from Dublin, however, the drama is deemed to carry more risk via its impact on Russian trade with its close euro zone neighbours.

Of chief interest here is Germany, which carried out trade exceeding €76 billion with Russia last year. German industrial production started to fall soon after international sanctions took effect, although a jump in factory orders in October allayed concern somewhat.

Yet Germany’s Committee on Eastern European Economic Relations, a powerful business lobby, complains that exports to Russia dropped 17 per cent in the first nine months of the year and are forecast to decline by up to €8 billion this year. It was not for nothing that German industrial titans BASF, Siemens, Volkswagen, Adidas and Deutsche Bank all opposed an escalation of sanctions earlier this year.

For all that, the rapid drop in oil prices is perceived to offset trade risks for net energy importers in the euro zone.

Yet with Germany’s economy flat – and the wider single currency area out of puff – the concern must be that the latest ructions in Russia will deepen the euro zone’s malaise.This is bad news from an Irish perspective, notwithstanding forecast growth next year.

Ukraine effect

Standard & Poor’s puts the chance of a triple-dip euro zone recession by the end of next year at 25 per cent. Even before the fireworks in Moscow this week, S&P had expressed concern about the potential for the Ukraine stand-off to affect economies farther afield.

A sharp economic contraction now looms in Russia, yet president Vladimir Putin remains defiant. At a three-hour news conference yesterday – with more than 1,000 journalists in attendance – he held forth at length but offered no new remedy.

Saying recession could continue for two years, he said Russia’s $415 billion (€338 billion) pool of reserves was enough to weather any crisis but would not be spent “thoughtlessly”.

Even as French president François Hollande raised the notion of scaled back sanctions in return for the Kremlin’s co-operation on Ukraine, Putin likened Russia to a bear protecting territory against the enemy. “As soon as they chain it, they’ll rip out its teeth and claws.”

This is one to watch. It could get worse before any improvement.