There Is A Sense Of Panic In Russia: This Could Be Putin’s Surprise Move Says Former U.S. Ambassador
Michelle Fox, writing on this evening’s CNBC website, quotes a former U.S. Ambassador as saying “there is a sense of panic in Russia after yesterday’s surprise interest rate hike from 10.5 percent to 17 percent — by the country’s Central Bank in a failed effort to stop the ruble from falling. However, he does not think Russian President Vladimir Putin will necessarily resort to war or stir up regional trouble, to distract the populace from focusing on Russia’s deteriorating economic situation. “I actually get a sense of panic among economic elites right now; and, that makes Putin more cautious,” said Michael McFaul, a Professor at Stanford University said in an interview with CNBC’s Power Lunch.
Instead of making some kind of geopolitical/nationalist move that might result in a rally around the flag at home, Ambassador McFaul “sees a different type of surprise coming from the Russian President,” Ms. Fox wrote. “I actually think they may think about changing his government. I think that might be the surprise move you might see in the coming days or weeks.”
Ambassador McFaul said he “noticed a feeling of nervousness among his friends and colleagues in the country that surprised him; and, happened quicker than he expected.” He added that “there is also the beginning of a debate as to whether Putin is choosing wise economic policy. I think he’s going to have to do something to stop the bleeding. Just the status quo is not going to be good enough,” he said.
Carlos Pascual, former U.S. Ambassador to Ukraine and Mexico, and the former State Department Special Energy Envoy, believes there is now an opportunity to find a way out of this crisis,” Ms. Fox noted. “With the ruble in “free fall” and Russia unable to refinance debt — the only way out of the crisis is for Russia to get access to international capital markets,” he said in an interview on CNBC’s Street Signs.
“So the challenge today, is for both Russia and the West, and in particular Germany, to create a framework that can also bring in Ukraine…to begin to find ways to resolve the Ukraine crisis; and, bring Russia back into a path of normalcy that will allow it to gain access to international capital.”
Don Jensen, Senior Fellow at the Center for Transatlantic Relations, isn’t as optimistic that the Ukraine situation will be resolved. “A frozen conflict is much more likely. He can’t afford to go further,” he said. “He’s [Putin] has painted himself into a corner where he needs this high — in the 80s, still public support…to maintain his authority; but, there isn’t any near-term signs it’s going to go down,” he said. “That’s a longer-term problem, once some of the economic hardships we’re seeing now filter through the society.”
Massive Wealth Destruction
There has been massive wealth destruction — due to the free fall in the price of oil and the Western sanctions imposed as a result of Russian actions with respect to Ukraine. Just in the past month the ruble has lost half it’s value versus the dollar. The average yearly salary in Russia is about $13,000 per year. Due to the devaluing of the ruble and rising prices/inflation — in just the past month — that $13,000 yearly salary is now equivalent to somewhere in the neighborhood of $5,500. And, those billionaire Russian oligarchs who have been the biggest beneficiaries of Putin’s reign — are now seeing their wealth evaporate overnight; and are beginning to feel the squeeze. There is a complete lack of confidence in Russia’s Central Bank; and, maintaining interest rates at or near 17 percent cannot be sustained for very long. Although Russia has plenty of capital reserves — some estimated $460B, Moscow does have $160B in foreign debt obligations that have to be paid/financed in the next 12 to 18 months.
If oil does not stabilize here, panic in Russia and a run on the banks is not out of the question; and, it could happen quickly. Already, several major hedge funds on Wall Street are saying that “dollars are scare,” in the country and foreign investment and capital is leaving the country as a “flight to safety,” in anticipation that the situation is likely to get worse — before it gets better.
Russia gets as much as 50 percent of its total net yearly revenue from the sale of oil and natural gas. And, those revenues have now been cut in half. Economic forecasts are dim, with the World Bank now forecasting a deeper recession in Russia in 2015, while some major Wall Street financial firms forecasting a negative GDP for Russia in 2015 — perhaps as much as -4.5 percent.
Smart Money Is Betting Oil Goes Lower — Maybe To The Mid-$40s
Russia badly needs oil to stabilize here and begin to show some signs of upward momentum. But, the smart money says oil is likely going lower. Brent Light Sweet Crude closed down today, down $1.41, or -2.3 percent, to $59.80 — and, critically below the key technical level of $60. Meanwhile, West Texas Crude closed lost 53 cents, or -.95 percent to $55.40. Expectations among many is that oil is likely to move lower, below $50, perhaps by the end of this year, or early 2015. If that happens, it is hard to see the wealth destruction not having a negative impact on global, macroeconomic growth; and, a negative impact on stocks.
Traditionally, and historically, we get a “Santa Claus” rally in stocks into the end of the year. I am bucking that historical trend and moved mostly to cash and, Treasury Inflation Protected Securities this morning. We saw a rally mid-day in stocks; and, a 350pt. swing from the highs to the lows of the day; but, we closed at or near the day’s low — which usually begets more selling and follow through tomorrow, The Federal Reserve meeting announcement tomorrow at 2pm may throw a monkey wrench into things; but, I am bearish on stocks here in the short-term, and cautious — until we get a better sense of where the next big move in the price of oil; and, whether or not Ambassador McFaul is right — and Vladimir Putin’s political future is in doubt. V/R, RCP