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Commentary

Russia Hikes Interest Rates as Ruble Goes Through the Roof

Russia’s being deep sixed by the fall in crude oil prices. The Russian Ruble has crashed to a record low of 55 to a dollar, which would make its 2014 performance devastating.

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That is because the crude oil prices have fallen all the way to $60 a barrel. (This is WTI, Brent is below $65)

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This hurts Russia because it is a massive exporter of crude. But let’s think in rubles. If crude at $100 was giving them 3,300 rubles at the 33 USD/RUB rate, then crude at $60 is giving them the same $3,300 at 55 USD/RUB.

In that sense there is no inflation of crude prices within Russia, but a lot of other things will have gotten far more expensive, if they have to import them. That’s stoked inflation, which is running at 9%. And to attempt to control that inflation, Russia has raised rates five times, the latest one today to 10.5% (a 1% increase).

Russians, to save their money from being devalued, are taking their money overseas. (Russia freed the ruble to make it a floating currency earlier this year, after spending a large amount of money defending it) They are even buying cars, which supposedly aren’t losing value on purchase.

The situation will (and should) bring India and Russia together. We don’t trade that much with each other, but India is not party to the sanctions placed by the US etc. Things are happening – Russia will help India with 10 nuclear power generating reactors, and will build an advanced helicopter in India.

The falling prices of crude oil will make Russia less dependant on that export, over time – but meanwhile they will go through a recession. What isn’t evident is how that will work out for the rest of the world.

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  • Kaushik says:

    Its actually inflation in Russia in some sense temporarily.
    http://www.zerohedge.com/news/2014-12-10/russian-inflation-watch-hookers-hike-rates-100-amid-crashing-currency
    But overall its tilting heavily towards deflation. Deepak we desperately need an article on possible deflation in indian context.

  • Guruprasad V says:

    India should use this situation and try to get access of Oil resources that could probably helpful for our long term. Securing Oil resources should be our priority.

  • Shyam says:

    Can someone throw some light on how we can invest exclusively in Russian Shares? This is exactly what happened to India in August 2013 when Markets bottomed out at 5118 and Rupee at 68 odd. The returns in dollar terms is almost 80% from that point. Its clearly extreme fear and algo led selling that is masking all fundamental valuations.

  • Leo says:

    there is a global implosion happening..check again russian currency was not crash when oil was 35 dollors in 2009 …it has crashed 60% more below 2008 ..this is the HINT that GLOBAL bond market is about to implode with emerging market capital outflows from bonds..NEX is india and china ..yuan is tanking and will rapidly fall now.WHich means USD meltup 30 40%
    yes russian shares are awesome in valuation can start accumulating…SHYAM long term oil is heading higher to 400+ dollors