December 19, 2014

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The EU's confusion about sanctions

We noted yesterday that the Europeans are horrified by the idea that sanctions might be working and that was reaffirmed clearly in last night's European Council, which ended at midnight. Federica Mogherini, who still seems to present the Italian position in her new role, said:

"The fact that Russia finds itself in a difficult financial situation is not good news. Not for the people of Russia, of the Ukraine, not for Europe, not for the rest of the world."

Her former boss, Matteo Renzi, yesterday ruled out new sanctions against Russia, as did France. And Francois Hollande even held out the prospect of current sanctions being phased out if Russia takes a more conciliatory position. Corriere della Sera had this to say this morning:

"Some countries have geopolitical and cultural ties with the old Russia, which they are not ready to sacrifice for a regional crisis, however prolonged and dangerous it may be."

One of Vladimir Putin's many friends in the EU is Romano Prodi, who stopped by for a visit. The Kremlin published pictures of the visit showing a beaming Prodi embracing his old pal.

After stabilising following some intervention, the ruble traded this morning at 61 to the dollar. Money market rates are in the range of around 25% this morning - comparable to the crisis levels of 2009. We noted a comment from Simon Tilford (@SimonTilford), who noted:

At these kinds of exchange rates #Russia's economy is only around a quarter bigger than the Dutch one. Funny kind of 'superpower.'

The fall in the oil price and the decline in the ruble are signficant events, which will have a lasting impact on the Russian economy. 

The FT noted in its coverage that the money market rates are pointing to a brewing crisis in the banking sector, where the collateral pool has declined in value. The article also noted that several industrial companies, including GM, Jaguar, Audi and Ikea have temporarily suspended shipments to Russia, while Belarus is no longer accepting rubles as payment for its exported goods to Russia.

In another story, the FT notes that syndicated loan volumes by foreign banks have collapsed to just 14% of the 2013 level, a trend that will continue in 2015. A credit crunch will be the inevitable consequence. 

Among the comments, we noted Paul Krugman who makes an interesting point about Russian debt. He writes that the problem is not the oil price as such but its linkages to Russian balance sheets. While the country's debt-to-GDP level is not very high, that number was masked by the overvaluation of the ruble. Now comes the fall, and foreign currency debt becomes an issue. He also makes the point that the ruble depreciating does not bring the usual export boost, since Russia relies on oil and gas exports.

Marcel Fratzscher says the current crisis may well be worse than the one in the late 1990s. He said it was the goal of financial sanctions to trigger a crisis of confidence among investors. He says the probability of a default is high - and adds that Germany has no interest in a Russian bankruptcy.

Our other stories

Or main focus is Russia and the economic instability that might arise from the current situation. We also have a detailed story on the options for Greece now; on the ECB’s decision to publish minutes, on the Ifo index, on the resignation of Spain’s public prosecutor, and on the history of debt forgiveness in Europe.

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