Global Economic Crisis

Sheldon Filger-blogger for GlobalEconomicCrisis.com

War is the province of uncertainty. When the ruler of Russia made the fateful decision to invade Ukraine, by all accounts he expected a blitzkrieg that would overrun the country in a matter of days. Now, one and a half years into a vicious war with no end in sight, the chickens are coming home to roost in terms of economics.

Apologists for Putin claimed that the sanctions imposed on Russia were not working, and pointed to the appreciation of the national currency, the rouble, as evidence. In the first months of the war, the rouble did indeed gain value, but for reasons largely ignored by pro-Putin aficionados. In the first place, the cut-off of Western exports to Russia, combined with initially strong oil sales abroad, did improve Moscow’s balance of payments for a period of time, at least on paper. Then there was the monetary tightening engaged in by Russia’s central bank.

The governor of the Russian central bank is Elvira Nabiullina. She is a Yale-trained economist and is widely regarded as an excellent central banker. According to some media reports at the time of Putin’s decision to attack Ukraine, Nabiullina was opposed to the invasion and submitted her resignation, but Putin refused to accept it. Besides being one of the very few women in a senior government position in the Russian Federation, Nabiullina is respected as highly professional by her foreign colleagues. In the wake of the invasion and the swift decline in value of the rouble, she undertook a massive increase in monetary tightening, raising interest rates for a period to as high as 20 percent. This halted the decline of the rouble, and brought about its subsequent appreciation. As the currency stabilized, Nabiullina gradually lowered interest rates.

However, the Russian central bank cannot control macroeconomic trends unleashed by the war. Western countries that were once major customers for Russia’s energy exports have, in a surprisingly short period of time, largely weaned themselves away from Russian oil and natural gas. To replace lost markets, Moscow has been forced to sell its energy exports to other countries, especially China and India, at a large discount. This has eroded revenue earned from Russia’s major export commodity. In addition, the war has added tens of billions of dollars in unanticipated annual military expenditures, while tightening the supply of labor due to army mobilization and the decision by hundreds of thousands of Russians, the majority being young men, to flee the country. Finally, the sanctions have reduced Moscow’s access to large sums of capital, including foreign currency reserves. All these steps have cumulatively had a negative impact on the Kremlin’s finances.

The government’s budget deficit is exploding, and the large current account surplus that existed in the early months of the invasion has been severely diminished. All these developments have eroded the value of the rouble, which dropped in value from around 70 to the U.S. dollar at the beginning of the year to about 100 to the dollar in August.

Predictably, the ultra-nationalist media and blogger community attacked Nabiullina, blaming the central bank for the collapse of the rouble. In part under pressure from the government, the central bank has sharply increased interest rates from 8.5 % to 12 percent, an increase of 350 basis points. This most recent act of monetary tightening has brought a modest appreciation in the rouble that is likely to be temporary. The fact is that Putin’s war has unleashed a torrent of negative macroeconomic trends. While Russia’s large energy and agricultural sector renders it immune to total economic collapse, the nation is likely to experience increasingly sluggish and even negative economic growth, combined with high inflation that will erode the already meager disposable income typical for the vast majority of Russians. This increasingly dire economic trend does not bode well for Russia’s future political stability.

Sheldon Filger-blogger for GlobalEconomicCrisis.com

One of the leading credit rating agencies, Fitch, had lowered its assessment of credit worthiness of the U.S. from the top level of AAA to AA plus. Though only a notch lower than the top level, the new rating by Fitch may be the start of a disturbing trajectory for American sovereign debt.

The explanation given by Fitch for lowering its rating on U.S. Government debt has been what it views as the deterioration of governance in the USA over a period spanning two decades. The evidence of this is apparent to any observer of political discourse and activity in the U.S. and raises questions about the long-term stability of the American political system. The economic and financial repercussions of those internal developments will now have a steep cost, as Fitch is likely to be followed by other rating agencies.

While U.S. Treasury Secretary Yellen has been joined by leading analysts in decrying the move by Fitch, it is clear that this rating agency is looking far beyond current economic data, which on paper makes the Amerasian economy appear strong, especially compared with other major economies. It must be noted that the U.S government functions on a a sea of red ink. It must constantly borrow vast sums of money to function. What has made that vast debt edifice functional has been credit access tied to the lowest possible borrowing costs. The decision by Fitch is an indication that the costs of sovereign borrowing by the U.S. will escalate. This opens up the possibility of a long-term sovereign debt crisis in the U.S., which would have devastating consequences far beyond\d America’s shores.

In 2022 the U.S. federal government deficit was 1.4 trillion dollars, representing 5.5 % of GDP. Total federal spending was 6.3 trillion dollars, with revenue of only 4.9 trillion dollars. Interest paid on the national debt that same fiscal year was 476 billion dollars, presenting a whopping 35 % increase over the prior year. Now, with the first crack in America’s AAA credit worthiness having occurred, substantial increases in annual debt servicing costs are to be expected, eating up a growing percentage of the federal government’s fiscal capacity.