I've written much on Eurasian Integration, and it's really gone into overdrive with the Ukraine crisis. Here's a new piece for Russia Direct on how Ukraine is killing integration... and how China is benefiting.
It's been tough to keep up the blog when everything is going kablowey in Ukraine. but yesterday's crash in Russian markets meant I had to give a lot of commentary on the fly. For your edification, you can check me out here on RT talking about "Black Monday" and here on Dukascopy Swiss Financial TV talking about the same thing (slanted a bit more heavily to interest rates).
Also, I've been fighting twitter trolls who apparently can't quite get that free speech means "you can say what you want" and not "if you don't say things are are unabashedly pro-Russia and anti-Western you are some kind of Nazi and we will track you down at your employer and spam everyone you work with." I think that's the price of fame these days, and I'm not even famous. Russia is a funny place sometimes, but the internet remains the last bastion of nutjobs, wingnuts, trolls, and Stalinist loonies. Either way, enjoy my commentary!
I think this is going to be a big deal, actually, as KZ is not only firing a shot across the bow of Russia and its Customs Union partners, but it's also the opening salvo in QE infinity related tightening as well. In their statement explaining the devaluation, the National Bank of Kazakhstan pointed the finger at the Fed:
“As a result of the reductions in quantitative easing in the U.S., capital is flowing from developing markets into developed markets, which has led to pressure on currencies,” the central bank said in the statement.
Now, this begs several questions:
1. We saw emerging market currencies get pummeled in August with the first worries about QE infinity being withdrawn, as the capital flows of printed/helicoptered money looked like they were going to be withdrawn. The whole QE experiment may have stopped the US economy from dying (as if that were ever a possibility), but it has left it on life support, with everyone worried what happens once the government unplugs the machine. And while policymakers in DC thought that they were doing the best thing for the US economy (doubtful), they also didn't care about the consequences outside the borders, which was a capital flow boom... with interest rates at nil in the US and advanced economies, the artificial money had to go somewhere, and that somewhere was emerging markets. How much do you want to bet that the policy response, led by ninnies like Joe Stiglitz, will be that capital controls are now necessary again?
2. The National Bank of Kazakhstan (NBK) has always been a bit of a rogue when it comes to policies; in my current position, I worked with them a few years ago looking at their response to the financial crisis vis a vis Ireland and Iceland. This move, which is much bigger than expected, may signal that they have a sense that things are going to go south quickly, and they want first-mover advantage. Or else, they really are doing such a dramatic move to strike at Russia?
3. How will this hit the ruble? As of right now, it's holding steady, but the ruble has already been in a bit of a free-fall. Is this a tit for tat between Customs Union members? Or is that in store?
4. What will this do for Ukraine? Does Yanukovych, even if he does hang on, want to put his perilously overleveraged, antiquated, and dilapidated economy in the middle of a currency war? The hryvnia is already in a free-fall of its own.
So this could be an isolated, regional effort that shows the difficulties inherent in the Customs Union project. Or it could portend something much worse for the global economy. Stay tuned!
With apologies to Foxy Shazam
Living in Russia, working for an emerging markets think tank, and being paid in rubles, makes you acutely aware of geopolitical tensions, emerging market ripples, and Russia-specific factors. This has been especially true over the summer as, to be polite about it, the ruble plummeted against the US dollar. Now, there's usually a good amount of seasonality for the ruble/USD exchange rate, with drops in the summer due to the lower price of oil and, of course, the fact that the Russians book it out of Moscow as fast as their private jets will take them (meaning more demand for foreign currencies and less for rubles). But this summer, the bottom dropped out:
From just about the 29.8 mark in February, the ruble is now at about 33.40 and climbing daily (with bank premia for foreign exchange, you can sell ruble at about 33.85 this morning with Raiffeisen). That's a loss of 12% (hellooooo depreciated paycheck), not gigantic by historical standards but still a pretty hefty drop in a market where the price of oil hasn't seen major swings.
But is this an aberration? Well, yes and no - looking at the Ruble since it became "new" in 1998, we're basically part of a trend that started during the global financial crisis and shows no signs of abating:
So we're not as weak as we were, not as strong as we were, just somewhat bouncing around in the 30-35 range. And this is in line with a general sell-off from emerging markets, as the financial world starts to believe that Ben Bernanke's money spigot won't run forever and "quantitative easing" might actually recede from the US. Russia is just part of a general trend of emerging market pullback.
That's the no, this is not an aberration. But the yes is that, for some reason, the world seems to be waking up to the unsustainable nature of Putin's economy, and we have a big shift in momentum just over the past two months. Putin hasn't helped any, as his new Central Bank head is fairly similar to those in Western countries; i.e. looser monetary policy somehow grows economies magically! And Russia has always been willing to use its economic riches for geopolitical gain (although, as a colleague of mine detailed in RBK Daily earlier this year, the Russian stance on Syria actually caused it some problems with the Saudis, who retaliated by ramping up their oil production to depress prices). The question is, can the almost completely un-diversified Russian economy survive the next round of economic uncertainty?
The best part of this is also the bit that makes me so angry - the structure of the Russian economy has been basically frozen in place during Putin's reign, due to uncertain property rights, bureaucratic nightmares (one need only look at Russia's place in Doing Business), and a widespread perception of corruption. And, of course, the institutions needed for a market economy are still fledgling here, subsumed to the formal bureaucratic apparatus of the state. Transaction costs may not have been spawned in Russia, but by golly this place perfected them. So why are traders and the world starting to fret now about Russia? Why is the ruble sliding now? Why have Russia's revised growth estimates suddenly taken the world by storm?
Better renegotiate my contract, because I sense that 34-35 rubles to the dollar isn't far off.
Dr. Christopher Hartwell is an institutional economist and President of CASE Warsaw. All commentary on this page is exclusively his own and in no way represents the views of CASE, his wife, his dog, or anyone else. Especially not his wife or his dog.