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Russia's economy expected to get worse in year ahead after rouble's fall
The week ended with relief in Moscow, but the economy is still expected to get worse next year
PUBLISHED : Sunday, 21 December, 2014, 10:10pm
UPDATED : Sunday, 21 December, 2014, 10:10pm
Agence France-Presse in Moscow
The rouble stabilised at the end of the week. Photo: AP
Deep recession, skyrocketing prices and a fragile banking system: although the rouble seems to have stabilised after its abysmal drop this past week, Russia still faces the heavy consequences of the turbulence.
For most Russians, the week ended with relief: after trading at unbelievable levels of 80 to the dollar and 100 to the euro, the rouble appears to have stabilised at around 60 and 73, respectively.
A double whammy of Western sanctions over Ukraine and plunging oil prices finally caught up with the country that depends on energy exports for half of government revenue, and the authorities only acted as the rouble's plunge in value had already gained momentum.
After the rouble fell by nearly 10 per cent on Monday, the central bank moved beyond its limited currency market interventions and in the middle of the night hiked the key interest rate by a tremendous 6.5 percentage points to 17 per cent.
But that failed to stop the panic, with the rouble dropping by 20 per cent on Tuesday - bank websites crashed as too many users tried to connect, and crowds packed Ikea until 2am to get a hold of goods before announced price increases took effect.
Russian President Vladimir Putin tried to put a brave face on the crisis at his annual end-of-year press conference, saying recovery was "inevitable", although he admitted it could take up to two years to materialise.
"The trend of the economy in the next six months is certainly going to be much worse", said Chris Weafer, an analyst with Macro Advisory consultancy.
"Confidence is shaken - in the central bank, in the currency, in the direction of the economy," he said.
"Consumption and investment are going to take a hit because of higher [interest] rates, inflation will be higher because of the weaker currency … the banks are going to turn to the government and shelves will be empty after the New Year."
In a sign of the challenges ahead, several suppliers have halted deliveries in a bid to raise prices. Some stores closed their shutters - Apple stopped sales via its Russian online store, while Ikea suspended sales of kitchens and home appliances.
Stores selling imported alcohol or clothing were also trying to avoid selling at a loss while observers said many Western brands would soon disappear.
That trend has begun and inflation - already close to 10 per cent - threatens to reach 15 per cent in the coming months. This will hit the purchasing power of Russians, whose real incomes already fell in the first 11 months of the year compared with 2013.
Even the central bank estimates the economy could suffer a sharp contraction of nearly 5 per cent next year if oil prices stay at current levels.
The downward spiral of the rouble brought back memories of the crisis in 1998, when Russia defaulted on its debt.
"There is no reason for [that]: Russia was a bankrupt country then and now it's … in a pretty good shape," Weafer said.
