Original post:
From our Dec. 7 post: Evans-Pritchard: "Dollar surge endangers global debt edifice, warns BIS":
Two quick points*:And from Fortune:
1) This is the second BIS warning in under six months.
2) It is very dangerous to borrow in a currency other than the one in which you earn your income.
True at retail, true at wholesale....
The decline of the ruble is the result of Western policy. The question now is how will Putin respond?
The Russian economy was already in the running for having the worst year in 2014, sandwiched somewhere between Congressional Democrats and Sony Entertainment Pictures.Definitely related:
Then the price oil—the commodity upon which the Russian economy is built—began to fall sharply, draining the nation’s economy of foreign money and crimping its growth. This dynamic drove the ruble sharply lower, culminating in an 11% drop on Monday, which forced Russia’s central bank to raise interest rates by a whopping 650 basis points, all but assuring a deep and painful recession in 2015.
But with strict sanctions in place against Russian companies—in response to Russia’s annexation of Crimea and hostilities with Ukraine earlier this year—and the continuous fall in oil prices, the interest rate hike did not satisfy traders, who sent the the ruble tumbling another 8% following the announcement.
The fall of the ruble has been swift and devastating. Carl Weinberg, chief economist at High Frequency Economics, referred to the currency’s plummet as “an unrecoverable spiral” in a note to clients on Tuesday. He argues that what we are seeing now is a classic “currency collapse,” brought on by both economic factors like sanctions and falling oil prices as well as financial factors like the Russian central bank printing money to help state-owned oil company Rosneft cover its debt denominated in foreign currencies.
What makes the situation in Russia that much worse is that the nation’s companies, both private and state-owned, hold $670 billion in debt denominated in foreign currencies. This debt is about one-third the size of the entire Russian economy, and it will become impossible for Russian companies to service it if the ruble continues to fall. Writes Weinberg:
The amount of rubles local borrowers have to give up to pay off foreign debt obligations just increased by 20 percent overnight, by 50 percent since the start of this month, and by 90% since the start of November…. The effective interest rate on foreign borrowing for Russians is over 6000%, enough to kill any economy.Normally, when countries find themselves in a situation like Russia’s, they turn to the IMF, which would provide funding and debt restructuring in exchange for the enactment of economic reforms. But as University of Oregon economist Tim Duy writes, it’s tough to see either the IMF swooping in to help an international pariah like Russia or Vladimir Putin submitting to any reforms imposed by the West....MORE
Oh Crap: There's An Oil Angle In The BIS' Warning On Market Instability
UPDATE: "In Which Izabella Also Comments On Russia and Foreign Liabilities"
