President Vladimir Putin said Russia shouldn’t waste currency reserves protecting the ruble as the country braces for a recession brought on by the collapse of the oil price and sanctions over the Ukraine conflict.
“Under the most negative external economic scenario, this situation can last 2 years,” Putin said today at his annual press conference in Moscow. “If the situation is very bad, we will have to change our plans, cut some things.”
The country’s reserves have declined by a fifth to $416 billion over the past year as the central bank tried in vain to defend the currency. Russia won’t force exporters to exchance revenue earned in foreign currency to prop up the ruble, the president said.
Putin is addressing citizens after the currency plunged this week, bringing back memories of the financial crisis that wiped out Russians’ savings in 1998, the year before he came to power. The ruble has dropped more than 40 percent since June as oil trades near a five-year low and sanctions over the Ukraine conflict hit the economy.
Putin has enjoyed near-record approval ratings since Russia annexed Ukraine’s Crimea peninsula in March. Putin today accused the U.S. and European Union of using the Ukraine conflict as way to contain Russia as they have done since the end of the Cold War through the expansion of NATO, comparing the current situation to a new division akin to the Berlin Wall.
“Our partners didn’t stop, they saw themselves as victors, an empire, and all others are vassals and have to be subdued,” Putin said. “The crisis in Ukraine should make our partners understand that it’s time to stop building walls.”
After an emergency meeting, the central bank announced the largest interest rate increase since Russia’s 1998 default in the early hours of Dec. 16, increasing the key rate by 6.5 percentage points to 17 percent. The Russian currency lost about 3 percent to 62 rubles to the dollar.
That failed to halt the slide in the ruble, which at one point during the day fell to a record of 80 per dollar, from 34 half a year ago. It rebounded 12 percent yesterday after the Finance Ministry pledged to use as much as $7 billion to support the currency.
The central bank also announced steps yesterday to stabilize the banking system, including allowing lenders to use a third-quarter exchange rate -- before the acceleration in the ruble’s decline -- to value risk-weighted assets.
Economy Tumbling
As Russians feel the effects of accelerating inflation, which rose to 9.1 percent in November, the fastest since June 2011, the economy may shrink almost 5 percent next year if oil prices stay at $60, the monetary authority forecast last week.
“It’s no longer possible to go on in the same fashion, the economy is tumbling,” said Masha Lipman, an independent political analyst in Moscow. “But the problem is political, there has been a powerful tilt away from liberal-minded economists toward the security elites.”
A truce that began on Dec. 9 in eastern Ukraine has started to take hold. Russian Foreign Minister Sergei Lavrov backed Ukraine’s territorial integrity and rejected the notion of a “second Crimea” in the eastern Ukrainian regions of Donetsk and Luhansk as he struck a conciliatory tone in an interview with France 24 television on Dec. 16.
Putin believes that he’s facing a coordinated effort to undermine him, including a speculative attack on the ruble by foreign investors, said Sergei Markov, a political analyst who advises the Kremlin staff. U.S. President Barack Obama is ready to sign a law passed by Congress last week authorizing new sanctions against Russia, the White House said Dec. 16.
Putin said today that as much as 30 percent of the current economic troubles are linked to the impact of the sanctions.
Putin Says Mustn?t Waste Reserves on Ruble as Economy Sinks - Bloomberg
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