How To Prepare Your Portfolio For 2015 (Part 4 of 5)
The Russian markets and currency have not been able to stabilize; the Russian ruble had plunged earlier in the fortnight, despite a massive interest rate hike by the Russian central bank. The rate hike was the largest single increase since 1998, when Russian rates soared past 100% and the government defaulted on its debt.
Market Realist – The Russian economy (RSX) has been beleaguered by a precipitous drop in oil prices (USO)(BNO) by almost 46%. In Russia, 50% of budget revenue comes from oil and natural gas taxes. A Moody’s Investors Services report estimates that 25% of the Russian GDP is inextricably linked to the performance of the Russian energy industry. So plunging oil prices have affected the economy severely. The Russian ruble has taken a severe hit, with more than a 50% decline in the currency this year. The Russian Central Bank, in a bid to defend its currency, increased its benchmark interest rates from 10.5% to 17%. This sudden Russian rate hike is the highest rate hike since 1998.
Market Realist – The Russian central bank has estimated that GDP might shrink by more than 4.5% in 2015 if oil prices average $60 a barrel. The bank also estimated that net capital outflows for 2014 could balloon to more than double what they were last year. The previous graph shows how the ruble has dropped and the central bank’s response.
The Russian rate hike is a desperate move to stabilize the country’s financial system and protect its currency. Tight liquidity measures would likely squeeze Russian corporates and could strain Russia’s credit system severely. The move is unlikely to propel any sort of growth.
The crisis in Russia has caused a volatility spike in US (SPY) and European markets (EZU). It’s also caused anxiety among emerging market (EEM) investors.
Read on to the next part of this series to see what you should be doing in this context.
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