The economy of Russia is exhibiting some of the signs of hyperinflation

Just when ordinarily markets would begin shutting up shop for Christmas and the New Year, at least in the western world, another crisis has hit financial markets. A side effect of the falling oil price if we add in a soupcon of other issues has seen a financial crisis rage in Russia. One impact of this illustrates something which I have discussed since the beginning of this blog which is that so much of modern life depends on the ability to know or at least estimate a price for a good or service. In this instance it was not the consumer in difficulties but the produced as PC Advisor explains.

On Monday, the price of a 16GB iPhone 6 on the Russian Apple store was equivalent to $688 at the day’s exchange rate. On Tuesday, that same smartphone was going for the equivalent of just $574, a 17% decline for Apple.

Apple had already tried to deal with the falling ruble by boosting the price of the iPhone 6 by 25% last month, from 31,900 rubles to 39,900 rubles for the 16GB model.

In response to such volatility of price Apple closed its online store in Russia yesterday. It is not really something that we expect in the modern era is it? We have some to expect technology and its variance appliances to be on tap whenever we want them to be.

Russian shoppers

These have been acting logically if you think about it and for once some part of what is known as economics 101 is coming true.

According to press reports, Russian consumers Tuesday rushed to purchase high-ticket goods, particularly appliances, before the value of the ruble fell even further or prices were boosted to compensate, hoping to have something tangible in hand in case the currency collapsed.

Technology as an apparent or perceived store of value gives us plenty of food for thought. After all it says something about the perceived value of (Rouble) money in Russia that a relatively fast depreciating product is preferred to it does it not?

Indeed another sign of turmoil has been indicated by the Wall Street Journal.

’Lanta Bank, a midsize Moscow lender, said its foreign counterparts would be unable to send foreign currency Wednesday as aircraft that typically transport cash are full.

What got us into this mess?

It was only last Thursday that I pointed out that the Russian economy was facing a grim 2015 and since then plenty of things have changed sadly almost entirely for the worse. The oil price was then US $63.42 (Brent Crude) and the level of the Rouble was already at crisis levels.

This morning it has fallen to yet another new low of 57.7 Roubles to the US Dollar.

The Rouble continued to fall and on Monday night the Central Bank of Russia released an extraordinary statement which I would say was full of machismo if the Governor was not a woman.

From 16 December 2014 the Bank of Russia Board of Directors decided to raise the Bank of Russia key rate to 17.00 percent per annum. This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks.

You would not want a tracker mortgage there would you? If you did have one your mortgage rate has gone up by more (6.5%) than the vast majority pay in the UK in total. You may note that the statement mentions the R(o)uble depreciation risks first when previously we have been told that the interest-rate rises were to limit the march of inflation.

This reminded me of the crisis days at the Bank of England in 1992 when it announced interest-rate rises totalling 5% on a single day. However the latter part of 3% never actually happened as before the next day the UK had been forced out of the Exchange Rate Mechanism. There was a difference here as the Bank of Russia made the move.

Currency Turmoil

There was a brief half-life for the resultant rally in the Rouble which saw it push back up to 58 versus the US Dollar or to where it had been only a few days before. However after at best a couple of hours it started to fall again and my did it fall! Some found it significant as it moved into the 60s and passed the oil price (Brent Crude), other remarked on it passing Vladimir Putin’s age and then on “When I’m 64” by the Beatles. Then as the downwards spiral continued the opportunity was provided by the Connells to sing along with this.

I was the one who let you know
I was your sorry ever after ’74-’75
Giving me more and I’ll defy
‘Cause you’re really only after ’74-’75

At one point within a two-minute period I saw people reporting that the exchange rate was at 72 and 80 respectively. That is what you call a fast market! Of course it is also a wide market and I would imagine that they had been asked which way they wanted to trade?!

So an extraordinary adrenalin rush took place combined with a lot of unease and confusion. Russians may well have been putting Genesis on their existing I-Pods but not new ones….

There’s too many men
Too many people
Making too many problems
And not much love to go round
Can’t you see
This is a land of confusion.

The braver ones might have associated this line with their leader.

Ooh Superman where are you now?

Meanwhile the Bank of Russia was presumably counting its losses on its currency intervention which had been just shy of US $2 billion on Monday alone. So far this month estimates of its total expenditure are of the order of US $10 billion.

Today

The Bank of Russia or its later ego the Ministry of Finance has had another go at ramping the price of the Rouble. It started the day at around 70 to the US Dollar then retreated to 72 followed by a sharp rise to 63 but has now fallen back to 68. There are now various threats around a possible introduction of capital controls which seems a bit late don’t you think? Also there is a promised enquiry into exchange-rate manipulation. By the Bank of Russia? Oh hang on…

Comment

If we step back from the wild gyrations of this week which are remarkable considering it is only Wednesday there is much to ponder. If we just look at Russia itself we see that foreign goods right now do not have a price, or to be more specific only have one until existing supplies run out. The next price will be much higher. This will be true to a lesser extent for Russian goods too if they rely on imported goods and services. As time goes by even primarily domestic goods are being impacted more and more by inflation. No wonder Russian have mobbed their shops and presumably places like Apple’s online store whilst they could anyway!

Accordingly if we move to wider economic and financial aggregates where do we and they stand? It will be extraordinarily hard to have any idea of what inflation is in Russia and therefore economic output is virtually impossible to measure in such turmoil. Trade values will vary markedly depending on which currency you use to price/value them. In other words this week in Russia has seen many of the features of a hyperinflationary episode just as so many were telling us such an event was impossible in these times.

That is before we look at the wider implications of such events. If your business involves trade with Russia what can you do except insist on payment in another currency? At the moment many may not be so keen on being paid in oil. If we look beyond the economics there are clear dangers in prodding the Russian bear this way.

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19 thoughts on “The economy of Russia is exhibiting some of the signs of hyperinflation

  1. You can see why so many of them have hedged their currency risk by buying UK property or even UK Football clubs. Even in an extreme house market collapse they aren’t going to lose 30%. You can leave a house empty without renting it and it is still worthwhile.

    Of course this isn’t helpful to the current population of the South East of England who are short of houses but then the UK and Ireland are the only countries in the world that have no restriction whatsoever on who can buy property so we are uniquely place to help the world’s rich at the expense of our own young people.

    • Hi bootsy and welcome to my corner of the blogosphere

      Whilst the Rouble has strenghtened again tonight after some more intervention all of the Russians who got their money into foreign currencies and assets up to a week ago must be feeling good tonight. I guess there will be some happy faces in the Royal Borough of Kensington and Chelsea.

      As for the UK housing market I completely agree as UK citizens are increasingly priced out of the market,

  2. Economic history has many examples of markets reacting dramatically – anybody who claims “this time it’s different” or “it isn’t possible now” is a fool.

    The Western European politicians ought to take notice of these facts

    1 ) It happened suddenly
    2 ) It was caused by factors outside Russian control
    3 ) It is hurting the poorest most

    British politicians should urgently try to balance the budget to reduce the risk of a similar hyper-inflationary currency collapse in Britain.

    IDS claims he is “making work pay” -> what nonsense. If a family on the minimum wage needs housing benefit top up to pay the rent -> then plainly pay is inadequate and rent is excessive. The tories are also falsely claiming to be achieving “austerity”, regular readers will have seen data detailing the ongoing deficits, which debunks such claims.

    • I’m not sure substantial tightening would benefit the UK economy just now. The right time for that was before the credit crunch when we were experiencing boom conditions. What they could do however, is to cancel he insane Help to Buy and “funding for (mortgage) ending” schemes which are driving prices ever higher. Surely the answer to the housing prices are having prices which ordinary people can afforn in the normal course of events. What’s that you say The banks’ capital position? Plus ca change…

      • A little tightening will hurt a little, but the counter argument is that hyperinflation is much harsher. Better safe than sorry ….

  3. Hello Shaun,

    I’m not so sure that Russia has enough internal trade to weather the storm over 6 months or more . It is increasingly worrying to me that the Western powers are interfering because they need to teach Russia a lesson, well Putin atleast .

    It all depends on the velocity and nature of the Russian economic collapse . Shades of Syria here ( a Russian ally ) . Sort term its looking to be sever . Do out Too Big to Fail Leaders expect to win ? win what ? a leadership change I think , taking sides in Ukraine was a slap in the face for our TPTB .

    As always follow the money ……

    Frobin

    • Yes, I share your concern, I think letting Russia suffer financial melt-down could in extremis allow IsIs in the east, Does Europe prefer that? The Russians are un-predictable, brutal and not very modern, I do worry about collateral damage.

  4. Hello Shaun,

    As brought up by Expat it seems at the current rate of 63K per month reductions in “recorded” unemployment we’ll have zero in about 2 1/2 years .

    I could do it in one swift pen stroke . – all put on zero hour contracts tomorrow !!

    Seems our HMG is taking the long way home …….

    It still will not help with the tax receipts , and with fiddles in GDP , CPI and Unemployment , Russia maybe be getting some stick but are we being fooled?

    “Won’t be fooled again ” – The Who

    Forbin

    PS: I also worry about goading the Russian bear, will they think we’re another Hitler or Napoleon ?

    Ah interesting times indeed!

    • Hi Forbin

      It is a bit like reak wages in the UK where one month of gains in October where wage growth (1.8%) versus official inflation (1.3%) apparently means everything is okay. The long sequence of bad months and the fact that a amjor player in this has been the fall in inflation gets ignore.

      Also if we use the RPI then real wages are still falling as it was at 2% in October…

  5. If the West is waging economic war against Russia, in order to topple Putin, that is stupidity in the extreme.
    Putin is Russian democracy’s only hope, and I’d remind you of the August Putsch.

    • buzzin

      If they are then I agree totally

      if they are not BUT will not help then , well , Syria comes to mind then Norht Korea or Somalia

      And the Russians have nukes……

      Forbin

      • “Won’t get fooled again ??”
        “Meet the new boss – same as the old boss”

        They also have Gas supplies to hold back too. What have they got to lose?
        You might need to eat your popcorn from under the duvet.

  6. Hi Shaun,

    Genesis eh? That takes me back … as fan in my teens and twenty years later Phil collins is making me a bacon sarnie and a coffee in the studio kitchen.

    Chaotic conditions in Russia and the ease with which things have got to this point make one wonder …

    Is this the way out from this endless scene?
    Or just an entrance to another dream?

    “The Light Dies Down On Broadway”

    • Hi Jim M

      I had to look it up as I was only aware of The Lamb Lies Down on Broadway. Sill a Phil Collins fan (Stephen Gerrard) will be happy tonight after Liverpool’s win.

      As to Russia we now await Putin’s speech ahead of which low and behold everything has rallied!

  7. In FT recently it was noted that “Global credit rating agency Moody’s recently suggested this could lead Ukraine to default on its international debt next year by pushing the country’s debt to GDP ratio above 60 per cent, triggering an early repayment clause on $3bn of pre-crisis credit provided by Russia.” It also said that the research head at Investment Capital Ukraine doubted this scenario would ever work itself out. “’The procedure would be long and Ukraine could challenge it,’ Mr Valchyshen said, pointing to a lack of clarity in specific clauses of the bond agreement.” I would think that after this huge devaluation of the ruble, Russia would be more likely to push for early repayment tan previously, but I’ve never been a bond trader.

    • Hi Andrew

      You raise an interesting point. I think the first issue is how far the West is willing to go in terms of supporting Ukraine via the IMF. After akk it is a highly politcal organisation these days.

      As to Russia and a request for repayment I would imagine that such a request would be played for political as well as economic advantage.

  8. I’m becoming concerned that Putin is waiting for the cold snap in Europe and the UK at which point he will start looking critically at the supply pipelines. As to what he’ll do at that stage, I have no idea and I don’t think he does either which makes him/Russia all the more dangerous.

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