Wednesday, December 17, 2014

"Money, after all, only has value as long as we think it does."

Matt O'Brien

Matt O'Brien, in his report "Checkmate, Putin. Russia’s economy is stuck in a catch-22", in The Washington Post of December 16, 2014.

Matt discusses the unprecedented fall of the Russian currency - ruble - to the lowest level of 80 rubles per dollar despite increase in the interest rates from 10.5 to 17 percent. According to him, Russia is facing the economic catch-22 situation for which, typically, the word "checkmate" is used. 

Russians have totally lost confidence in their currency. They are using any rubles they can't turn into dollars to go on shopping sprees buying things like like cars, real estate, Ikea furniture, and Apple products, which is only going to lead to ruble's faster demise.

"Money, after all, only has value as long as we think it does. If ordinary people decide that they'd rather turn all their rubles that are rapidly losing value into things that won't,"  Matt writes adding that Russians are exactly doing that. "It's a bank run on the currency. Prime Minister Dmitry Medvedev has already asked Russia's top exporters to behave "responsibly" and Russian Finance Ministry has started selling foreign currency to keep ruble alive.

It is widely felt that in order to stabilise ruble, Putin might declare capital controls that make it illegal for people or companies to turn their rubles into foreign currency. Next few days are going to be crucial not only for Russia but for global markets, too.

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