Russia’s strong veneer was thrown off as the government conceded to a crisis that is spreading to the economy and their exchange traded fund (ETF).
In two months, Russia has spent $57 billion defending the ruble, but the Kremlin is worried that it is showing little or no effects, according to The Economist.
Industrial production growth has almost stopped since chugging along at 5.4% in the first half of the year. The World Bank predicts a drop to 3% in 2009. In five months, the stock market has lost two-thirds of its value.
Russia has the third-largest reserves, but it still allowed firms to borrow cheaply from abroad. The World Bank states that debt made up almost 85% of Russia’s total capital inflow last year thus resulting in an external debt higher than Russia’s $475 billion in reserves.
The central bank has to resist the ruble’s depreciation, as outflow of capital is used by firms to exchange rubles for dollars to repay foreign debt or to protect themselves from fluctuations in currency.
Economists see that rising wage arrears show non-payments will tamper with consumption, a major source of growth.
On Nov. 11, the central bank raised interest rates by 1% to 12% to stem capital outflows and allowed the ruble to depreciate against a number of currencies by 1%.
The central bank suggests raising interest rates above inflation, which was 14% in October, to discourage people from changing rubles into dollars, due to the depreciation of the ruble. By defending the ruble, Russia will bleed out is reserves and raising interest rates without liberalizing the economy would smother it.
The Market Vectors Russia ETF (RSX) could be in for some more grueling times. It is down 73.2% year-to-date.