The only way is down?

December 17, 2014

A man walks out of a building past a board showing currency exchange rates in Moscow

No further dramatic interventions by the Russian authorities overnight with the result that the rouble has opened five percent weaker against the dollar in Moscow.

After a 6.5 point interest rate rise to 17 percent on Monday night failed to buy the currency more than two hours of buoyancy, options are running thin. The rouble has now shed over 50 percent of its value since mid-year.

At around 70 or 80 it will push inflation through the roof and the central bank has said the economy will contract 5 percent next year. Ordinary Russians are really going to feel this. The government also faces hefty debt redemptions which are becoming vastly more expensive the further the rouble falls.

Einstein may or may not have said the definition of insanity was doing the same thing again and again and expecting a different result. But the point stands. There seems little point in pushing rates up further given the lack of traction on markets.

The only options would appear to be capital controls, which the Kremlin has said it won’t impose, for the central bank to continue burning through its reserves or give up the ghost and allow the market to set the rouble’s level wherever that may be.

What is beyond Moscow’s control is the oil price which has fallen again back below $60 this morning and the grip of western sanctions imposed over Ukraine. A fundamental de-escalation in Ukraine could change everything but few expect Vladimir Putin to take that path yet.

For the West the question is whether to double down on Russian sanctions to keep the pressure on, or give Putin some breathing space to avoid a full economic crisis. Mixed messages on that yesterday.

U.S. Secretary of State John Kerry said Russia had made constructive moves in recent days towards reducing tensions in Ukraine and raised the possibility that Washington could lift sanctions if Moscow keeps taking positive steps. But the White House said Barack Obama will sign legislation authorizing new sanctions on Russia by the end of the week. An end-of-week EU summit bears watching in this regard.

The Greek parliament will hold a first vote this evening on the government’s nominee for president. The ruling coalition, with 155 lawmakers, will fall short of the 200 parliamentarians out of 300 it needs to win in the first round. The crunch will come in the third vote on Dec. 29 when the winning line drops to 180.

Prime Minister Antonis Samaras needs to secure the backing of about 25 independent lawmakers who are not in his coalition and probably some of the opposition too. If he falls short, he will be forced to call a snap election early next year that opinion polls suggest left-wing anti-bailout Syriza would win.

Syriza has recently taken a somewhat more moderate line but it is still avowed to abandon cooperation with EU/IMF lenders and reverse years of austerity just as the economy returns to growth, a stance that could see it shut out of the markets and back to square one. That gives Greece’s euro zone peers a powerful incentive to help Samaras as much as they can.

Despite not being definitive, Wednesday’s first vote will give a strong indication of how well placed Samaras is to prevail in the third round. Ruling party officials have suggested any tally short of 160 votes would be a setback. The final result could turn on the decisions of a handful of seven or eight parliamentarians from the smaller parties.

Samaras has warned of a “catastrophic” return to the height of Greece’s debt crisis – when it risked being driven out of the euro zone – if his government falls. That could yet prove to be a powerful argument. Syriza has accused him of scare-mongering and blackmail to win support.

Despite the drama in Russia, the big event for the markets will be the Federal Reserve’s last policy meeting of the year.  After a strong jobs report last week, speculation has grown that the Fed might temper its commitment to keep interest rates near zero for a considerable time yet. Either way, expectations for a mid-2015 interest rate rise are intact.

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