What happened December 15 and 16 was the obvious result of the chain reaction sweeping through the Russian economic and financial system despite the aggressive interest rate rise of Central Bank of Russia in attempt to stop rouble's relentless slide. But what to expect in the future?
Since this summer, we could observe steep depreciation of the rouble, accelerating during these past few weeks - said Karád Kovács, Senior Analyst at Innovative Securities. This has resulted in a close to 100% rise in the USD/RUB exchange rate since the beginning of the year. This dramatic change is the consequence of the falling oil prices, since primary commodities account for more than half of Russia's exports and the government's budget revenue - said Kovács. Worsening the situation during the last few months, Western sanctions are partially responsible for capital flight from Russia - pointed out the analyst.
Russia's Central Bank had to make a move: December 15, raised interest rates by 650 basis points to 17%, without precedent since the Russian sovereign default of 1998.
But Russia's debt is far less than in the 1990s, so there is a smaller chance to state's bankruptcy. However, in the corporate sector that may occur - said Kovács. Corporations have $100-150bn debts due next year that they will not be able to refinance without access to USD sources. Either the central bank provides them USD, or they will have it from their own cash flow, while corporations that will not be helped will easily go bankrupt.
Oil companies may reduce their capital expenditures by billions of dollars but most of the companies face the same problems. While their income decreases, they need to solve problems by significantly cutting off outcomes/investments. As a consequence, recession grows in the economy that is already in recession. This will also have an impact on the banking system, withdrawing credits and thus worsening even those companies' situation that have not been affected yet.
As a result of the sanctions, Russia soon has to face a financial liquidity crisis with unpredictable consequences. Probably, there is no easy and immediate solution for Russia, but a long term recession would not help Europe either. Increasing oil prices could help, although there is little chance of that happening, we have reasons to expect oil prices stay as low as they are now.
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