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.
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.
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.
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…
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.