The Russian economy is heavily dependent on oil – prices of which have been falling precipitously – and sanctions imposed by western governments in retaliation for Russia’s aggressive action in Ukraine are putting extreme pressure on the country’s currency.
There is concern the Russian government and/or Russian companies lack sufficient currency reserves to pay debt that will come due next year and international capital markets are effectively closed due to western-imposed sanctions.
“That is what everyone is worried about. You have a massive devaluation and you’ve got to repay $160 billion, and there’s virtually no refinancing available to Russian companies on international markets due to the sanctions,” Boris Jordan, CEO of the Sputnik Group, told “Squawk Box.”
And in an interesting twist reported by the New York Times, state oil company Rosneft received loans from the Central Bank obtained by issuing bonds as collateral.
“When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank. The deal roiled the ruble on Monday, according to analysts.” – New York Times
Energy Minister Alexander Novak is confident oil prices will stabilize over the medium term and said Russian companies will not cut output in a bid to support oil prices, according to a Bloomberg article. Given lower oil prices, companies need to pump as much as possible to maintain revenue. Cutting could simply be too painful.
At the same time, the US is ratcheting up sanctions against strategic Russian sectors including energy and defense.
The efficacy of economic sanctions against Russia has been in question for months, but it now appears the drop in oil prices is pressuring the currency and forcing President Putin into a fragile economic situation that could weaken him politically. This will be an important situation to watch as we enter the New Year.
“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview with the Times.
