Lower Oil Prices Sends Russia Careening Toward Recession — Or, Worse

Lower Oil Prices Sends Russia Careening Toward Recession — Or, Worse

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The news service Reuters, is reporting this afternoon (Dec. 26, 2014), that have “put Russia’s economy on course for a sharp recession next year,” Russia’s Finance Minister said Friday. “Russia’s economy is slowing sharply, as slump Western sanctions over the Ukraine crisis deter foreign investment, and spur capital flight — as the sharp in oil prices severely reduces Russia’s export revenues and pummels the ruble.” Moscow recently raised interest rates to 17 percent, in an attempt to stabilize the ruble; but, analysts are pessimistic on the outlook for both the ruble and the Russian economy,” Reuters said.

Russia’s Finance Minister Anton Siluanov told journalists on Friday, that the Russian economy could shrink by 4 percent in 2015 — it’s first contraction since 2009,” if oil prices remained near the $60 level. West Texas Crude fell today $1.15, or -2.06 percent; to $54.69, while, Light Sweet/Brent Crude was lower by 92 cents, or -1.53 percent to $59.32. Silunaov added that Russia would run a budget deficit of over 3 percent in 2015 — if oil prices remain at these depressed levels. “We need to have our budget break even at $70 per barrel by 2017,” he said.

“At 3:45pm in Moscow, the ruble was trading at 54 to the dollar, a sharp rebound from its recent low of 80; but, still far weaker than the 30-35 range it was trading at in the first half of 2014,” Reuters said. “If oil goes down to $50 per barrel…I don’t think our authorities will be able to artificially maintain the [ruble] rate, even with higher sales by exporters,” said the head of treasury at a major Russian bank,” whom Reuters said asked not to be named because he was not authorized to speak publicly about the issue.

Russia also “significantly scaled up rescue funds for its Trust Bank, saying they would provide $2.4B in loans to bail out the mid-sized lender.” “The falling ruble has sparked panic buying of foreign currency in Russia; and, a spike in deposit withdrawals, and heaping pressure on a vulnerable domestic banking sector — whose access to international capital markets has already been restricted by Western sanctions.

The credit rating’s agency — Standard and Poor’s — said this week, “it could downgrade Russia’s rating to junk, as soon as January…due to a rapid deterioration in “monetary flexibility” in the country. Meanwhile, Reuters notes, “Russian gold and forex reserves have fallen to their lowest level since 2009. Last week, reserves dropped by as much as $15.7B to below $400B, down from over $510B at the start of 2014.”

I am getting increasingly concerned with the U.S. stock market rally that we’re getting into the year’s close. If oil remains in the mid-$50s, or lower, we could see a run on banks in Russia, and potential contagion of economic instability in Europe. The U.S. stock market will not be immune to an economic implosion in Russia — and, if you remain 100 percent invested in stocks — you better have a quick trigger — if things continue to deteriorate — the ruble could once again — and quickly — see 80 to the dollar and the heightened prospect of social unrest in the country. V/R, RCP

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