A full-blown currency crisis. That’s one way to describe the situation in Russia, where even the attempted “shock and awe” of a 6.5 percentage point-hike in interest rates failed to halt the rouble’s slide on the foreign exchanges. The other is to say that Russia has been engaged in an economic war with the west – and has just lost.
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So where does that leave Russia? Like Lamont, it has reached the end of the road with interest-rate increases. If a 6.5-point rise proves insufficient to halt the collapse of the rouble, it is hard to know what would do the trick. What’s more, it’s clear that some members of the policy elite in Moscow are unhappy with the idea of further damaging an already weak economy through draconian increases in interest rates to defend the currency.
As a result, there are now only two options. The first is to allow the rouble to find its own level, in the hope that the decline in the oil price will prove temporary and that rising demand for energy as the global economy recovers will push up the rouble against the dollar. The other is to introduce stringent capital controls. These are seen very much as a last resort by Moscow, but may prove necessary if the rouble rout continues.
The phrase “perfect storm” is much over-used, but in Russia’s case it is entirely apposite. The country has a collapsing currency, a collapsing economy and sky-high interest rates. The question now is how the Putin government responds. If Moscow softens its line over Ukraine, it will be a case of mission accomplished for the west. But if economic agony makes a wounded Russian bear even more belligerent, it could prove to be a hollow victory.
