Is The Nightmare Scenario Now Playing Out For The Russian Economy?

Russia Risks Soviet-Style Collapse As Rouble Defence Fails -- Ambrose Evans-Pritchard, The Telegraph

'What is happening is a nightmare that we could not even have imagined a year ago,' says Russia's central bank

Russia has lost control of its economy and may be forced to impose Soviet-style exchange controls after "shock and awe" action by the central bank failed to stem the collapse of the rouble.

“The situation is critical,” said the central bank’s vice-chairman, Sergei Shvetsov. “What is happening is a nightmare that we could not even have imagined a year ago."

The currency crashed to 100 against the euro in the biggest one-day drop since the default crisis in 1998 as capital flight gathered pace, despite a drastic rise in interest rates to 17pc intended to crush speculators and show resolve.

Yields on two-year Russian bonds spiralled to 15.36pc, while credit default swaps are pricing in a one-third chance of a sovereign default. The shares of Russia’s biggest lender, Sberbank, fell 18pc.

Neil Shearing, from Capital Economics, said the spectacular failure of the rate shock may bring matters to a head. “If a rise of 650 basis points won’t do the job, we are near the end. That means stringent capital controls,” he said.

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My Comment:  Will the Russian economy implode? For the moment everyone that I know in Russia is expecting hard times .... but implosion and bank runs (something that I did see in Russia in the early 1990s) .... no one is there yet. As I had said in a previous post .... the subways and trains are still running on time. Pensions and salaries are being paid. Medical, educational, and social services are still functioning. And ... the government is still working.

The problem for Russia is if this crisis continues for the medium to long term .... credit markets have now frozen up .... and if the rouble continues its decline .... inflation and difficulty in obtaining foreign goods will be the rule rather than the exception.

As to what is my prediction .... as long as the crisis in Ukraine continues .... and it will continue .... the Russian economy will continue to be impacted by sanctions, and with declining oil prices .... a double whammy for the Kremlin who has become dependent on oil revenues to pay for its programs.