Russia Tangles Planned Rate Hikes

Russia’s Currency Problems

Russia is scrambling to keep the Ruble from collapsing.

Recently, we talked about the risk/reward of investing in Russia. While that opportunity still exists, the rewards are decreasing.

Anticipating international blowback, Russia shored up its reserves of foreign currency. The problem is most of that is abroad. And now much of it is frozen.

With the Ruble tumbling, the central bank hiked interest rates 20% in an emergency order, telling firms to sell their holdings of foreign currencies.

By selling all their foreign currency revenues, export firms have to buy the Ruble as an alternative.

But that’s only the start of problems.

Unsurprisingly, Putin banned all Russian residents from transferring hard currency abroad, including to service foreign loan contracts.

This move could potentially put $478 billion in external debt at risk of default.

All these moves make it harder and less likely for foreign companies to invest in Russia should the conflict resolve itself.

Not that these moves aren’t a good idea by Russia’s central bank and government, but they make it so foreign investors require additional compensation for them to take on ‘political’ risk.

While Russia has moved further away from foreign investment in the past decade, that’s also come at a heavy cost. The Russian economy has grown at abysmally low rates for several years before the 2020 recession.

In a nutshell, Russia has left itself with slower economic growth coming out of the conflict. And the longer it stays in, the worse its future gets.