Putin faces the music

December 18, 2014

Russian President Vladimir Putin attends a meeting at the Kremlin in Moscow

With a deep recession looming and the nose-diving rouble poised to push inflation through the roof, Russia’s Vladimir Putin faces the music at his end-of-year news conference when he will field questions from a studio audience as well as television viewers.

Expect accusations and recriminations about the West and speculators trying to do Russia down. The real issue is whether he has any sort of plan to ease Russia’s economic pain.

There seems little point in pushing interest 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 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 is holding a little above $60 this morning – and the grip of western sanctions imposed over Ukraine. A fundamental de-escalation in Ukraine could change everything but few expect Putin to take that path yet.

The rouble, which has shed half its value in the second half of the year, has gained three percent versus the dollar in early Moscow trade.

The Swiss National Bank has the opposite problem, trying to control a too strong currency.

The franc has been banging up against the cap imposed by the SNB three years ago so it has reacted  — imposing a negative exchange rate of -0.25 percent this morning on sight deposit account balances at the central bank as it seeks to deter safe-haven buying. The franc has dropped sharply in response.

Separately, Hungarian Prime Minister Viktor Orban has taken the rare step of calling a news conference with the governor of the central bank. There is no indication as to its subject.

For the West the Russian question is whether to double down on sanctions to keep the pressure on or give Putin some breathing space to avoid a full economic crisis. The White House says Barack Obama will sign legislation authorizing new sanctions on Russia by the end of the week but he has made clear he does not want to move out of step with Europe.

That throws a two-day summit of EU leaders into sharp relief. EU officials told us the bloc has agreed to widen its ban on investment in Crimea to target Russian Black Sea oil and gas exploration and will adopt the narrowly targeted measures at the summit.

Berlin said Russia’s economic plight was not primarily due to sanctions – German Finance Minister Wolfgang Schaeuble said Europe had no choice but to keep up pressure on Russia though the door remained open to dialogue.

However, we know some EU member countries who would like to see sanctions eased before too long, because of the harm done to their own economies by the throttling of business with Russia.

The summit will discuss Ukraine’s plight after Kiev said it was at serious risk of defaulting  unless Western donors come up with more funds on top of the billions of dollars of financial aid already promised.

European Commission President Jean-Claude Juncker said the International Monetary Fund estimates Ukraine needs another $15 billion in financing to withstand an economic crisis but the European Union has only limited capacity to help.

The EU leaders will also review plans to boost growth in the moribund euro zone.

Expect warm words about concerted efforts to fire the economy into action but in reality there is little sign of fiscal stimulus coming  with Berlin looking to balance its budget and Juncker’s investment plan, which will be signed up to at the summit, overwhelmingly reliant on the private sector.

European Central Bank chief Mario Draghi, who looks set to launch into quantitative easing next year and will attend the summit, has repeatedly said governments must play their part, putting in place structural economic reforms to increase growth potential and, where it is feasible, spend a bit more taxpayers’ money too.

Greek lawmakers failed to elect a new president in a first round of voting, leaving Prime Minister Antonis Samaras still looking for as many as 20 votes from independents and small parties to avoid snap national elections early next year which polls suggest anti-bailout Syriza would win.

160 of 300 lawmakers supported his presidential nominee. In the third round of voting on Dec. 29th he must secure 180 votes. A win for the government had not been expected on Wednesday but the result was below many expectations, just meeting the minimum threshold officials had seen as adequate.

On the data front, Germany’s Ifo sentiment index will be a potential market-mover as always.

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/