Captain Hammer wrote:The current state of the Russian economy is mostly a result of falling commodity prices. They have been running the economy off their oil and gas reserves for over a decade, but the low prices are unsustainable - even for the major producers like Saudi Arabia - over the long term. They have put interest rates up 7% in a single move, which is pretty extreme, but they're trying to smother consumer and business expenditure to stop things spiralling out of control, mostly because ripping the guts out of your own economy is better than having someone else do it for you. But it's only going to work if commodity prices start climbing again. It's probably the most dramatic thing they have done since Anatoly Chubais was running the show in the mid-1990s.
I would be careful wishing that outcome on Russia, if I were you. Russia is probably looking at a short-term recession at best. They will only produce what they need, and export as little oil and gas as they can, since current commodity prices mean those reserves are worth more in the ground than flowing into Europe. That means Europe might be faced with its own energy crisis. No doubt the Russians will be hoping that the demand from Europe will put pressure on the Saudis and OPEC to raise the price of oil so that they can stagger their own production and start getting money to flow back in, but it's going to be a tertiary objective of their current economic policy.
The Russian government have indicated that, for the short term at least, they will not cut their oil production until OPEC also cut back production - whilst in theory those reserves would be more valuable if they remained in the ground until oil prices rose, Russia is in a situation where the steady flow of capital provided by oil sales trumps those considerations.
However, the gut feeling is that, as the larger players within OPEC, such as Saudi Arabia, have very substantial reserves of cash (Saudi Arabia alone is thought to have more than $750bn in reserves to draw on), and since the Saudi's in particular have a policy aim of putting the US shale oil industry out of business, oil prices are likely to remain depressed until the Saudi's believe that they have pumped the US shale industry into oblivion.
Whilst the Saudi's are making losses on their oil sales, those substantial reserves mean they can hold out for several years before they face any sort of issues. Russia, who are caught up in this process, are hurting badly when they need prices above $100 per barrel for the state to fund its obligations - hence the collapse of the rouble and the severe action the central bank is taking. Unfortunately for the Russian Central Bank, it seems that the rest of the world is reacting to the shock rise in interest rates (they've gone from 9.5% barely a week ago to %17 now) badly - the rouble is sinking even faster as the rest of the world reads that move as a desperate gamble of an economy in crisis.
However, I do think that Putin may yet step in if he can to save the race - the Russian GP is mainly being staged as a projection of Russian prestige and a way of publicising Sochi, that symbolic holiday resort of the Russian leadership, so to have to surrender the race due to bankruptcy would be embarrassing for Putin and for the Russian government.
