Tuesday, December 16, 2014

Russia's Currency Crises

The Daily Mail reports:
The Russian rouble collapsed to a record low yesterday as the country’s economic crisis deepened. 
The Central Bank of Russia raised interest rates from 10.5 to 17 per cent in a desperate effort to prop up the currency. 
But the move triggered panic among international investors and the rouble tumbled by as much as 21 per cent against the US dollar. 
The crisis could weaken President Vladimir Putin’s iron grip on power as analysts warned the currency was in ‘free-fall’. 
* * *  
The rouble has fallen by nearly 60 per cent against the dollar this year on the back of the tumbling oil price and worries about the outlook for the Russian economy. 
Oil and gas account for 70 per cent of Russian exports and half of government revenues, making the country vulnerable to falling prices. 
Crude fell below $59 a barrel yesterday for the first time since May 2009, having traded at $115 as recently as June.
* * * 

Overnight, Russia had dramatically raised its interest rate from 10.5 to 17 per cent in a desperate effort to prevent the collapse of the rouble and boost its stricken economy. 
The surprise announcement was made at 1 am Moscow time and comes after the rouble's value has sunk roughly 50 per cent since January - battered by plunging worldwide oil prices and Western sanctions imposed over the conflict in Ukraine. 
The move is Russia' largest single rise since 1998, when interest rates soared past 100 per cent and the government defaulted on debt. 
Russia's economy is threatened by paralysis as the tumbling value of its currency pushes inflation to dangerous levels. The overnight action has somewhat allayed fears, however, prompting an immediate gain in the rouble and leaving it 1.6 per cent up on the Asian stock market. 
The Bank of Russia's aggressive move illustrated the size of the economic perils confronting Russia and reflected fears that the ruble's decline could trigger consumer panic and incite a run on banks. 
By raising interest rates, the central bank hopes investors will find it more financially appealing to keep their money in Russia rather than moving it to Western Europe, Asia or the United States. 
'They did it as a lure to encourage people to keep their rubles at home rather than continue to flee the currency and the country,' said Barry Eichengreen, an economist at the University of California. 
'It's a way of buying time. It doesn't solve any of the underlying issues that the Russian economy has,' he added, referring to falling energy prices, Western sanctions and widespread corruption. 
Such challenges are especially difficult because Russia's economy relies so heavily on petroleum revenue and lacks the diversification to withstand severe economic downturns.  
That tends to leave Russia at the mercy of global financial markets, where oil is priced in dollars.
The article indicates that Russia's economy will likely enter a recession.

The decline of oil prices is the result of Saudi economic warfare intended to destroy the American domestic oil production and/or Iran's economy. Of course, the Obama Administration is not going to complain--they would like to see domestic energy production crippled, and if it makes Russia bow to their wishes, so much the better as the Administration sees it.

In his 1796 farewell address, George Washington warned against factionalism, concentration of power in one branch of government to the detriment of the others, preserving the public's credit by avoiding debt, and becoming involved in foreign entanglements. Reading his address, one cannot but be struck by how the people of the United States and its government has disregarded every caution he provided. My thought, though, is of the latter of the warnings I listed. Washington stated:
Observe good faith and justice towards all nations; cultivate peace and harmony with all. Religion and morality enjoin this conduct; and can it be, that good policy does not equally enjoin it - It will be worthy of a free, enlightened, and at no distant period, a great nation, to give to mankind the magnanimous and too novel example of a people always guided by an exalted justice and benevolence. Who can doubt that, in the course of time and things, the fruits of such a plan would richly repay any temporary advantages which might be lost by a steady adherence to it ? Can it be that Providence has not connected the permanent felicity of a nation with its virtue ? The experiment, at least, is recommended by every sentiment which ennobles human nature. Alas! is it rendered impossible by its vices? 
In the execution of such a plan, nothing is more essential than that permanent, inveterate antipathies against particular nations, and passionate attachments for others, should be excluded; and that, in place of them, just and amicable feelings towards all should be cultivated. The nation which indulges towards another a habitual hatred or a habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest. Antipathy in one nation against another disposes each more readily to offer insult and injury, to lay hold of slight causes of umbrage, and to be haughty and intractable, when accidental or trifling occasions of dispute occur. Hence, frequent collisions, obstinate, envenomed, and bloody contests. The nation, prompted by ill-will and resentment, sometimes impels to war the government, contrary to the best calculations of policy. The government sometimes participates in the national propensity, and adopts through passion what reason would reject; at other times it makes the animosity of the nation subservient to projects of hostility instigated by pride, ambition, and other sinister and pernicious motives. The peace often, sometimes perhaps the liberty, of nations, has been the victim. 
So likewise, a passionate attachment of one nation for another produces a variety of evils. Sympathy for the favorite nation, facilitating the illusion of an imaginary common interest in cases where no real common interest exists, and infusing into one the enmities of the other, betrays the former into a participation in the quarrels and wars of the latter without adequate inducement or justification. It leads also to concessions to the favorite nation of privileges denied to others which is apt doubly to injure the nation making the concessions; by unnecessarily parting with what ought to have been retained, and by exciting jealousy, ill-will, and a disposition to retaliate, in the parties from whom equal privileges are withheld. And it gives to ambitious, corrupted, or deluded citizens (who devote themselves to the favorite nation), facility to betray or sacrifice the interests of their own country, without odium, sometimes even with popularity; gilding, with the appearances of a virtuous sense of obligation, a commendable deference for public opinion, or a laudable zeal for public good, the base or foolish compliances of ambition, corruption, or infatuation. 
As avenues to foreign influence in innumerable ways, such attachments are particularly alarming to the truly enlightened and independent patriot. How many opportunities do they afford to tamper with domestic factions, to practice the arts of seduction, to mislead public opinion, to influence or awe the public councils. Such an attachment of a small or weak towards a great and powerful nation dooms the former to be the satellite of the latter. 
Against the insidious wiles of foreign influence (I conjure you to believe me, fellow-citizens) the jealousy of a free people ought to be constantly awake, since history and experience prove that foreign influence is one of the most baneful foes of republican government. But that jealousy to be useful must be impartial; else it becomes the instrument of the very influence to be avoided, instead of a defense against it. Excessive partiality for one foreign nation and excessive dislike of another cause those whom they actuate to see danger only on one side, and serve to veil and even second the arts of influence on the other. Real patriots who may resist the intrigues of the favorite are liable to become suspected and odious, while its tools and dupes usurp the applause and confidence of the people, to surrender their interests. 
The great rule of conduct for us in regard to foreign nations is in extending our commercial relations, to have with them as little political connection as possible. So far as we have already formed engagements, let them be fulfilled with perfect good faith. Here let us stop. Europe has a set of primary interests which to us have none; or a very remote relation. Hence she must be engaged in frequent controversies, the causes of which are essentially foreign to our concerns. Hence, therefore, it must be unwise in us to implicate ourselves by artificial ties in the ordinary vicissitudes of her politics, or the ordinary combinations and collisions of her friendships or enmities. 
Our detached and distant situation invites and enables us to pursue a different course. If we remain one people under an efficient government. the period is not far off when we may defy material injury from external annoyance; when we may take such an attitude as will cause the neutrality we may at any time resolve upon to be scrupulously respected; when belligerent nations, under the impossibility of making acquisitions upon us, will not lightly hazard the giving us provocation; when we may choose peace or war, as our interest, guided by justice, shall counsel. 
Why forego the advantages of so peculiar a situation? Why quit our own to stand upon foreign ground? Why, by interweaving our destiny with that of any part of Europe, entangle our peace and prosperity in the toils of European ambition, rivalship, interest, humor or caprice? 
It is our true policy to steer clear of permanent alliances with any portion of the foreign world; so far, I mean, as we are now at liberty to do it; for let me not be understood as capable of patronizing infidelity to existing engagements. I hold the maxim no less applicable to public than to private affairs, that honesty is always the best policy. I repeat it, therefore, let those engagements be observed in their genuine sense. But, in my opinion, it is unnecessary and would be unwise to extend them. 
Taking care always to keep ourselves by suitable establishments on a respectable defensive posture, we may safely trust to temporary alliances for extraordinary emergencies. 
Harmony, liberal intercourse with all nations, are recommended by policy, humanity, and interest. But even our commercial policy should hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing; establishing (with powers so disposed, in order to give trade a stable course, to define the rights of our merchants, and to enable the government to support them) conventional rules of intercourse, the best that present circumstances and mutual opinion will permit, but temporary, and liable to be from time to time abandoned or varied, as experience and circumstances shall dictate; constantly keeping in view that it is folly in one nation to look for disinterested favors from another; that it must pay with a portion of its independence for whatever it may accept under that character; that, by such acceptance, it may place itself in the condition of having given equivalents for nominal favors, and yet of being reproached with ingratitude for not giving more. There can be no greater error than to expect or calculate upon real favors from nation to nation. It is an illusion, which experience must cure, which a just pride ought to discard.
I think Washington would be opposed to the Obama Administration's decision to voluntarily enter into a second cold war with Russia simply to advance or protect some general interest of the European Union. It cannot end to any advantage to us. What is our goal? To drive Russia into our sphere of influence? If so, we are violating the basic principles outlined by Washington because we will merely be creating additional entanglements. And if Russia's economy collapses, leaving chaos, what then? Do we want Libya writ large, with nuclear weapons? Obama is a fool, and I view all his policy choices as being folly, so it may bias my thoughts about the economic sanctions against Russia. But I fail to see our national interests being served by this low level economic warfare.

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