Russia is heading for a “full-fledged” economic crisis, President Vladimir Putin’s former finance minister warned, even as the ruble rallied for a second day.
The Russian currency, which hit a record low of 80 rubles to the dollar Dec. 16, traded at 54.5 rubles against the dollar at 5:32 p.m. in Moscow, up more than 12 percent over two days. The rally happened as companies sold dollars to pay local taxes and China signaled support to tackle the worsening economic slump in Russia.
The country’s gross domestic product may contract by 4 percent if oil prices stay at $60 a barrel, ex-Finance Minister Alexei Kudrin said, urging Putin to repair ties with the U.S. and European Union. “We are entering a full-fledged economic crisis,” he told reporters in Moscow today.
While the ruble’s plunge may have halted for now, economic challenges are mounting for the world’s largest energy exporter, which has been hit by U.S. and EU sanctions imposed over the Ukraine conflict and a 45 percent drop in the price of oil.
Inflation will accelerate to 12 to 15 percent next year, Russians’ real incomes will fall and imports will decline about 40 percent, according to Kudrin, who said sanctions aren’t hurting the economy any less than plummeting oil prices.
Presidents Meet
Efforts to end the eight-month-old conflict in eastern Ukraine faltered as Ukrainian President Petro Poroshenko met yesterday in Kiev with President Aleksandr Lukashenko of Belarus, which hosted negotiations that clinched a cease-fire in September.
While the truce has stemmed deaths, which exceed 4,700, no date has been set for a new round of peace talks in the Belarusian capital Minsk between pro-Russian separatists and Ukrainian government representatives.
Saudi Arabia (SABIC) and the United Arab Emirates reiterated pledges to keep pumping the same amount of crude, blaming non-OPEC producers for the glut of oil that’s driven prices to the lowest in five years.
Suppliers from outside the Organization of Petroleum Exporting Countries should cut “irresponsible” output, U.A.E. Energy Minister Suhail Al Mazrouei said in Abu Dhabi yesterday. Even if non-OPEC producers were to offer cuts, OPEC probably wouldn’t follow suit, Saudi Oil Minister Ali Al-Naimi said. The two countries account for about 40 percent of OPEC supply. Brent crude fell 0.5 percent to $60.80 at 3:43 p.m. in London.
Russia’s central bank raised its benchmark interest rate by 6.5 percentage points, the most in 16 years, to 17 percent last week, creating a money-market cash crunch that has helped the ruble recover 45 percent from its Dec. 16 record low.
‘Monetary Shock’
The higher interest rates and ruble weakness -- the currency is still down almost 40 percent this year -- are combining to hammer Russian companies and consumers. As a result the oil producer’s economy may shrink 7.9 percent in 2015, Danske Bank A/S said Dec. 19, revising a view for a 1.8 percent contraction.
“We’re seeing a serious monetary shock, especially next year,” Vladimir Miklashevsky, a strategist at Danske, said by phone. “What they’ve done is more serious for the economy than falling oil, it’s a big negative factor.”
The ruble gained today after China offered Russia help with the suggestion of wider currency swaps. Additional yuan income will not change the situation significantly because trade volume is not that high, though it is a political statement that may have a “psychological impact” and provide some support for the ruble, Natalia Orlova, chief economist at Moscow-based Alfa Bank, said by phone.
Oil, Sanctions
The success of Russia’s support for the ruble depends on oil prices and the longevity of sanctions, according to Oleg Kouzmin, an economist at Renaissance Capital in Moscow.
“At the current oil price of $60 a barrel,” if sanctions aren’t tightened, the ruble may average around 50 per dollar in the mid-term, Kouzmin said by e-mail. “If there is a massive run on the currency among the population,” the ruble might “move to levels that are difficult to quantify,” he said.
Putin urged business leaders, including executives of large exporting companies, to conduct “responsible” currency-trading policy during a meeting on Dec. 19, according to the Vedomosti newspaper.
The weak currency has prompted shops to raise prices for goods ranging from buckwheat to iPhones, and inflation reached a three-year high of 9.4 percent on Dec. 15. Apple Inc. (AAPL:US) raised iPhone prices in Russia by 35 percent, its second increase in less than a month, to account for the ruble’s plunge against the dollar.
In a sign of the corporate fallout, Russia’s second-biggest airline, Transaero, has run up 4.5 billion rubles ($82 million) of debts to fuel suppliers and warned the government it may stop flights without new loans and a freeze on fuel prices, TASS reported. The carrier said it had no plans to halt flights.
Russia, which relies on oil and gas for half of its budget revenue, must adapt to the reality of oil prices that could drop to as low as $40 a barrel, Putin said at his annual press conference in Moscow on Dec. 18. The country may have to live through a two-year recession, he said, blaming the crisis on the U.S. and the EU.
To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net
To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Tony Halpin, Michael Winfrey
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