For Russia's economy, the worst is yet to come

MOSCOW (AFP) - Deep recession, skyrocketing prices and a fragile banking system: although the ruble 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 ruble 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 came out of their apparent stupor only as the ruble's plunge in value had already gained momentum.

After the ruble 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 percent.

But that failed to stop the panic, with the ruble dropping by 20 per cent on Tuesday - bank websites crashed as too many users tried to connect, and crowds packed Ikea until 2 am to get a hold of goods before announced price increases took effect.

President Vladimir Putin tried to put a brave face on the crisis at his annual year-end press conference, saying that recovery is "inevitable", although he acknowledged it could take up to two years to materialise.

He did not announce any economic reforms or specific solutions to the crisis.

"The trend of the economy in the next six months is certainly going to be much worse" after this past week, 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 told AFP.

"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 decided to close their shutters - Apple stopped sales via its Russian online store, while Ikea suspended sales of kitchens and home appliances and warned that prices on the website "may differ from prices in stores".

Opel and Chevrolet are no longer delivering to dealerships.

Russian media said that stores selling imported alcohol or clothing including Zara, Topshop and Calvin Klein are also trying to avoid selling at a loss while observers predict that many Western brands will soon disappear from Russia.

That trend has begun and inflation - already close to ten per cent - threatens to reach 15 per cent in the coming months.

This will hit the purchasing power of Russians, whose real incomes already declined in the first 11 months of the year compared with 2013.

With the ruble having now lost nearly 50 per cent of its value against the US dollar in the past year imported food and consumer goods are quickly becoming luxuries.

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.

"Events have moved quickly and there are now growing signs that the currency crisis is spreading to the banking sector," wrote emerging markets economist at Capital Economics William Jackson.

Russia's financial sector is particularly vulnerable, as its state-controlled banking behemoths and a multitude of smaller institutions have been unable to raise funds in the West due to sanctions over Russia's annexing Crimea and support for separatists in Ukraine.

The central bank announced measures Tuesday aimed at ensuring their survival by improving access to liquidity and easing accounting standards.

On Friday, Russian lawmakers approved a bill on the recapitalisation of banks worth one trillion rubles (US$16 billion, 13 billion euros). The finance ministry is also hoping to increase capital in the banking sector by 13 per cent and the volume of loans issued by 15 per cent.

For many Russians, the downward spiral of the ruble brought back memories of the crisis in 1998, when Russia defaulted on its debt.

"People are behaving like it's 1998 but there is no reason for it: Russia was a bankrupt country then and now it's actually financially in a pretty good shape," Weafer said.

High oil prices over the past decade have allowed Moscow to pile up substantial hard currency reserves. Even after having spent heavily to support the ruble, the central bank's reserves still stand at around $400 billion.

Public debt is just over 10 per cent of GDP. The budget remains balanced and the government has a big rainy day fund to draw upon to sustain social spending.

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