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Putin Tries to Allay Russians’ Concerns

Putin Tries to Allay Russians’ ConcernsPutin Tries to Allay Russians’ Concerns

President Vladimir Putin assured Russians on Thursday that the economy would rebound after the ruble’s dramatic slide this year but offered no remedy for a deepening financial crisis.

In an assured performance at a three-hour news conference, he blamed the economic problems on external factors and said the crisis over Ukraine was caused by the West, which he accused of building a "virtual" Berlin Wall to contain Russia, Reuters said.

Despite pressure to fix an economy that is heading into recession and caught by what his economy minister called a "perfect storm" of low oil prices, western sanctions over Ukraine and global economic problems, Putin looked confident.

The ruble has fallen about 45% against the dollar this year, and suffered particularly steep falls on Monday and Tuesday, but Putin said its eventual rise was unavoidable, and avoided using the word "crisis".

"If the situation develops unfavorably, we will have to amend our plans. Beyond doubt, we will have to cut some (spending). But a positive turn and emergence from the current situation are inevitable," he said. "The growth of the global economy will continue and our economy will rebound from the current situation," the president said.

He said that Russia must diversify its economy to reduce dependence on oil. The recovery could start next year, he said, though economic problems might last another two years.

Ruble Falls

The ruble slipped as he spoke, and was about 1.5% weaker on the day. The central bank increased its key lending rate by 6.5 percentage points to 17% on Tuesday, and has spent more than $80b trying to shore up the ruble this year, but to little avail.

Although Putin said the central bank and government had acted "adequately", he chided the bank for not halting foreign exchange interventions sooner, suggesting more decisive action might have made this week’s big interest rate rise unnecessary.

"All this implies pretty big divisions within the administration as to how to react to the crisis and pressure on the ruble," Timothy Ash, head of emerging market research at Standard Bank in London, said in a note, adding that heads could roll.

Halt in Slide

The harsh reality is that US shale fields have much more to fear from plummeting oil prices than the Russians, since their costs of production are much higher, says Marin Katusa, author of The Colder War: How the Global Energy Trade Slipped from America’s Grasp, The Market Oracle said.

Russia’s ruble may have strengthened sharply Wednesday, but it’s plunge in recent days has encouraged plenty of talk about the country’s catastrophe, with some even proclaiming that the new Russia is about to go the way of the old USSR.

Don’t believe it. Russia is not the United States, and the effects of a rapidly declining currency over there are much less dramatic than they would be in the US.

This means that Russian oil producers can sell their product in these strong dollars but pay their expenses in devalued rubles. Thus, they can make capital improvements, invest in new capacity, or do further explorations for less than it would have cost before the ruble’s value was halved against the dollar. The sector remains healthy, and able to continue contributing the lion’s share of governmental tax revenues.

The ruble volatility is not going to affect the ability of most Russian companies to service their debt. Most of the dollar-denominated corporate debt that has to be rolled over in the coming months was borrowed by state companies, which have a steady stream of foreign currency revenues from oil and gas exports.

 

Financialtribune.com