A Full-Blown Economic Crisis Has Erupted In Russia

Vladimir PutinThe 8th largest economy on the entire planet is in a state of turmoil right now.  The shocking collapse of the price of oil has hit a lot of countries really hard, but very few nations are as dependent on energy production as Russia is.  Sales of oil and natural gas account for approximately two-thirds of all Russian exports and approximately 50 percent of all government revenue. So it should be no surprise that the fact that the price of oil has declined by almost 50 percent since June is absolutely catastrophic for the Russian economy.  And when you throw in international sanctions, wild money printing by the Central Bank of Russia and unprecedented capital flight, you get the ingredients for an almost perfect storm.  But those of us living in the western world should not be too smug about what is happening in Russia, because the nightmare that is unfolding over there is just a preview of the economic chaos that will soon envelop the whole world.

So far this year, the Russian ruble has fallen nearly 50 percent against the U.S. dollar.  That is a monumental shift.  And as the collapse of the ruble has accelerated in recent days, we are seeing scenes in Russia that are reminiscent of the Weimar Republic.  For example, just consider the following excerpt from an article that just appeared in the New York Times

Scenes that Russians hoped had receded into the past reappeared on the streets: Currency exchange signs blinked ever-changing digits, and Russians rushed to appliance stores to buy washing machines or televisions to unload rubles.

“We are seeing an economic crisis,” Natalia V. Akindinova, a professor at the Higher School of Economics, said in a telephone interview. “We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.”

In a desperate attempt to stop the bleeding, the Central Bank of Russia made an astounding move.  Last night it raised its key interest rate from 10.5 percent all the way up to 17 percent.

It was hoped that this desperate move would keep the ruble from plummeting any further.

And it did work for a few minutes, but then the collapse of the ruble resumed.  This is how Zero Hedge described the carnage…

For those wondering if the CBR’s intervention in the Russian FX market with its shocking emergency rate hike to 17% overnight calmed things, the answer is yes… for about two minutes. The USDRUB indeed tumbled nearly 10% to 59 and then promptly blew right back out, the Ruble crashing in panic selling and seemingly without any CBR market interventions, and at last check was freefalling through 72 74, and sending the Russian stock market plummeting by over 15%.

So why is this happening now?

Well, the biggest reason for the freefall of the ruble is the fact that the Central Bank of Russia just printed up about 625 billion rubles and gave it to their friends at Rosneft.

Rosneft is an absolutely massive oil company that is controlled by the Russian government.  For months, Rosneft has been asking for a bailout (sound familiar?) to refinance loans that can no longer be rolled over with western banks because of economic sanctions.

And on Friday they got one.

In an attempt to quietly slip this massive injection of new money past everyone, Rosneft issued 625 billion rubles worth of new bonds just before the weekend and the Central Bank of Russia gobbled most of those new bonds up with freshly created money.  Unfortunately for Rosneft and the Central Bank of Russia, the rest of the world took notice

With the oil giant in a bind, the central bank ruled that it would accept Rosneft bonds held by commercial banks as collateral for loans.

Rosneft issued 625 billion rubles, about $10.9 billion at the exchange rate at the time, in new bonds on Friday. The identities of the buyers were not publicly disclosed, but analysts say that large state banks bought the issue.

When these banks deposit the bonds with the central bank in exchange for loans, Rosneft will have been financed, in effect, with an emission of rubles from the central bank.

So that is what led to the panic selling that we witnessed on Monday.

Meanwhile, money is being pulled out of Russia at an absolutely staggering pace.  As confidence in the ruble and in the Russian financial system disappears, wealthy people are feverishly trying to protect their wealth by moving it somewhere else.  The following is an excerpt from an editorial that Mohamed A. El-Erian recently penned for Business Insider…

Rather than bring in buyers at these substantially cheaper levels, Russian currency weakness is inducing more selling, including by a growing number of worried bank depositors who, instead of holding their savings in ruble, are opting for safer dollars. The larger the extent of this “currency substitution,” the bigger the scope for capital flight out of Russia. This puts even greater pressure on the currency, aggravating the output contraction, imported inflation, and the general sense economic and financial instability.

It has been estimated that total capital outflows for 2015 will reach an astounding $128 billion.

And this could just be the beginning of the economic troubles for Russia.

If the price of oil stays this low or goes even lower, the Russian economy will shrink.  The only question is how much it will contract

The Bank of Russia said Monday that the country could sink into a deep recession next year if oil prices remain at $60 a barrel. GDP could contract by as much as 4.7% in 2015, and then by a further 1.1% in 2016 unless oil prices pick up.

Sadly, it isn’t just oil producing nations such as Russia that are going to be devastated by the coming crisis.

Eventually, the entire globe is going to feel the pain.

Last week was the worst week for global financial markets in three years, and so many of the exact same patterns that we witnessed just prior to the great financial crisis of 2008 are happening once again.  We have been living in a false bubble of relative stability for the past couple of years, but now time is running out.  The next great financial crisis is rapidly approaching, and 2015 promises to be the most “interesting” year that we have seen in ages.

The Rise Of The Bear: 18 Signs That Russia Is Rapidly Catching Up To The United States

RussiaThe Russian Bear is stronger and more powerful than it has ever been before.  Sadly, most Americans don’t understand this.  They still think of Russia as an “ex-superpower” that was rendered almost irrelevant when the Cold War ended.  And yes, when the Cold War ended Russia was in rough shape.  I got the chance to go over there in the early nineties, and at the time Russia was an economic disaster zone.  Russian currency was so worthless that I joked that I could go exchange a 20 dollar bill and buy the Kremlin.  But since that time Russia has roared back to life.  Once Vladimir Putin became president, the Russian economy started to grow very rapidly.  Today, Russia is an economic powerhouse that is blessed with an abundance of natural resources.  Their debt to GDP ratio is extremely small, they actually run a trade surplus every year, and they have the second most powerful military on the entire planet.  Anyone that underestimates Russia at this point is making a huge mistake.  The Russian Bear is back, and today it is a more formidable adversary than it ever was at any point during the Cold War.

Just check out the following statistics.  The following are 18 signs that Russia is rapidly catching up to the United States…

#1 Russia produces more oil than anyone else on the planet.  The United States is in third place.

#2 Russia is the number two oil exporter in the world.  The United States is forced to import more oil than anyone else in the world.

#3 Russia produces more natural gas than anyone else on the planet.  The United States is in second place.

#4 Today, Russia supplies 34 percent of Europe’s natural gas needs.

#5 The United States has a debt to GDP ratio of 101 percent.  Russia has a debt to GDP ratio of about 8 percent.

#6 The United States had a trade deficit of more than half a trillion dollars last year.  Russia consistently runs a large trade surplus.

#7 The United States has an unemployment rate of 7.4 percent.  Russia has an unemployment rate of 5.4 percent.

#8 Since Vladimir Putin first became president of Russia, the Russian economy has grown at a very rapid pace.  The following is from Wikipedia

Under the presidency of Vladimir Putin Russia’s economy saw the nominal Gross Domestic Product (GDP) double, climbing from 22nd to 11th largest in the world. The economy made real gains of an average 7% per year (1999: 6.5%, 2000: 10%, 2001: 5.7%, 2002: 4.9%, 2003: 7.3%, 2004: 7.2%, 2005: 6.4%, 2006: 8.2%, 2007: 8.5%, 2008: 5.2%), making it the 6th largest economy in the world in GDP(PPP). In 2007, Russia’s GDP exceeded that of 1990, meaning it has overcome the devastating consequences of the recession in the 1990s.

During Putin’s eight years in office, the industry grew by 75%, investments increased by 125%, and agricultural production and construction increased as well. Real incomes more than doubled and the average salary increased eightfold from $80 to $640. The volume of consumer credit between 2000–2006 increased 45 times, and during that same time period, the middle class grew from 8 million to 55 million, an increase of 7 times. The number of people living below the poverty line also decreased from 30% in 2000 to 14% in 2008.

#9 According to Bloomberg, Russia has added 570 metric tons of gold to their reserves over the past decade.  In the United States, nobody seems to be quite sure how much gold the Federal Reserve actually has left.

#10 Moscow is the second most expensive city in the world.  Meanwhile, the United States actually has the unfriendliest city in the world (Newark, New Jersey).

#11 More billionaires live in Moscow than in any other city on the globe.

#12 The Moscow metro system completely outclasses the subway systems in Washington D.C. and New York City.

#13 The United States has the most powerful military on the planet, but Russia is in second place.

#14 Russia has introduced a new “near silent” nuclear submarine which is far more quiet than anything the U.S. has…

The Borey Class submarine, dubbed Vladimir Monomakh, has a next generation nuclear reactor, can dive deeper than 1,200 feet, and carries up to 20 nuclear intercontinental ballistic missiles (ICBM).

Each of these “Bulava” ICBM’s can carry ten detachable MIRV warheads, what they call “re-entry vehicles,” capable of delivering 150 kiloton yields per warhead

#15 While Barack Obama is neutering the U.S. strategic nuclear arsenal, Vladimir Putin is working hard to modernize Russian nuclear forces.

#16 Russian missile forces will hold more than 200 drills during the second half of 2013.

#17 Russian Prime Minister Vladimir Putin made headlines all over the world when he climbed into the cockpit of Russia’s new “fifth generation” fighter jet and announced that it was far superior to the F-22 Raptor.

#18 It is estimated that Russia has more spies inside the United States today than it did at any point during the Cold War.

Unfortunately, whenever I write an article about Russia I find that most people simply do not get it.  They will make statements such as “the Cold War is over” or “Russia is our friend” which show a complete and total lack of understanding of the current geopolitical situation.

Russia has been steadily building a stronger relationship with China, and collectively they represent the number one strategic threat to the United States.

Someday this will become abundantly clear to the American people.  Hopefully it will not be too late by the time they realize it.

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