Even Without Sanctions, Russia's Economy Is Looking Sicklier Than Ever

Safety deposit boxes inside an OAO Rosbank bank in Moscow on April 22 Photograph by Andrey Rudakov/Bloomberg

Signs of Russia’s growing economic distress became even clearer today, as the central bank unexpectedly raised interest rates for the second time since March, while Standard & Poor’s cut the country’s debt rating to one notch above junk.

In lifting the benchmark borrowing rate from 7 percent to 7.5 percent, the bank said it was acting to cool inflation that’s now running above 7 percent. But, says economist Tim Ash of Standard Bank in London, “it has nothing to do with inflation. It’s all about signaling that the central bank is shoring up its defenses” to strengthen the ruble and stem the flight of capital from the country.

Whether the bank can achieve those goals looks doubtful. The ruble, the second-worst-performing currency among developing countries this year, continued to lose ground today, trading above 36.01 against the dollar. And, as S&P noted in its downgrade announcement, the standoff over Ukraine could spur capital outflows, which already exceeded $50 billion during the first three months of the year. Ash predicts the total could reach as much as $200 billion by yearend.

With Russian companies and consumers facing higher borrowing costs, the rate hike will depress an economy that’s already in danger of tipping into recession. And continuing political uncertainty over Ukraine means that foreign companies “will not invest in Russia’s real economy, they’ll just stall their investment,” Ash says.

Moreover, “inflation is likely to remain relatively high,” above 7 percent this year, emerging-markets economist Liza Ermolenko of Capital Economics in London wrote in a note to clients. “This is the result of Russia’s deep-seated economic problems—in particular, the fact that wages have been growing well ahead of productivity.”

All this while the West is still mulling tougher economic sanctions on Russia. President Obama, traveling in Asia, is planning a conference call with European leaders to discuss whether to expand the limited sanctions now in place. Secretary of State John Kerry warned in Washington on April 24 that Russia was running out of time to avoid sanctions. “If Russia continues in this direction, it will not just be a grave mistake, it will be an expensive mistake,” he said.

“What we’re seeing now is a pretty permanent exodus from Russia, and it will be very difficult for the Russian central bank to fight it,” Lars Christensen, chief emerging-markets analyst at Danske Bank in Copenhagen, tells Bloomberg News. “The central bank is very much between a rock and a hard place. They frankly seem quite desperate in their actions.”

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