What’s happening in Russia?
At 1 am today the Russian Central Bank raised its deposit rate from 10.5% to 17%. Emergency interest rate hikes announced in the middle of the night are not a sign of strength. Their goal is to stop the collapse of the Ruble, which has fallen from 35 to almost 70 to the dollar. A collapsing currency, international sanctions, and plunging oil prices are overwhelming their economy. It’s reminiscent of the collapse of 1998, when Russia defaulted on its debt and devalued its currency. But their economy has almost tripled in size since then.
Investors have already pulled out the equivalent of $100 billion in capital. If rate hikes don’t stabilize the currency capital controls are inevitable. Those might work, but they will cut Russia off economically from the rest of the world. In a modern economy, no country can afford that.
At this point, nobody knows what mischief Putin might dream up to distract his people from high inflation and economic recession. But no matter what happens, it’s going to be a long winter. Let’s hope a falling Ruble doesn’t lead to falling bombs.
Douglas R. Tengdin, CFA
Chief Investment Officer
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