Current Affairs

There is a concern that Trump will step in just when Russia runs out of steam. What does this mean, Russian interest rates are at an eye watering twenty one percent, the Rouble has lost value against the US dollar and the Chinese Yuan. There is an expectation that the rouble has further to fall, with some analysts arguing that the see sawing of Russian inflation, interest rates and the rouble is just getting going.

Russian Industry is already calling out for a decrease in the interest rate, the eye watering twenty one percent rate is slowing the economy just when there is a spending spree expected with not only the holiday season but also a significant ramping up of government spending on the military. It does not help that Russia has some barter deals, it ships oil on a market that is depressed compared to earlier in the year and Russia is running a deficit with China, where oil exports do not reach the value of goods imported from China, which is putting pressure on the Central Bank to further increase Interest Rates.

In an article in Carnegie, there is an argument whether Russia can continue to haemorrhage spending on the war in Ukraine, especially as the Kremlin is trying to manage an economy that has both increased spending to take out the inflationary pressures felt by ordinary Russians. But these arguments undermine the Central Banks remit to control inflation and the only tools they have are to increase interest rates and sell the foreign currency the economy is so desperate to keep.

Russians have reacted in a typical Russian way, which is to undercut the Rouble and buy US dollars and Chinese Yuan or any other stable currency they can get their hand on, which is also putting further pressure on the rouble. Russia is not quite going to capitulate as the Syrian government imploded, but there are significant pressure on the Russian government that wants to increase defence spending to nine percent in an effort to keep the pressure on the Ukrainians, Europeans and American’s, whose support of the war in Ukraine has been shaken by the results of the US election. 

But it is the Trump return to the presidency that is placing pressure on the Russians, their economy and the valuation of the rouble. It has been his statements about US oil prices, inflation and the general economy that has been shoring up the US dollar and pushing down oil prices. Ever since his election victory was announced there has been a bull market in the US and a bear market in Russia. Interest rates in Russia have increased by six percent as the price of gas and oil has reduced.

Trump’s determination to get inflation under control even though he has not got the presidency, challenges the world markets. His argument that the US is the largest producer of oil has brought the price of petroleum down by ten percent and this has meant that the international markets have acted to reflect his politicking. But it is also the bull that the NYSE is travelling on that has pulled economies that are under performing into the realm of inflationary arguments in reaction to the US market. And though the US market is in good shape the tax reduction that Trump is calling for has further pushed the market. His arguments of America first has challenged China already before his presidency.The fear of tariffs has knocked the confidence of all the other international markets and though Russia is not part of the world market due to the sanctions placed on the economy, there are plenty of Russians buying US dollars, which is not only weakening the rouble but is also pushing up inflation.

According to analysts the US market is placing pressure on world currencies and the argument of tariffs is placing pressure on governments to react to the US as well. But there is nowhere quite as vulnerable as China, which is dependent on the US market for a major part of their exports. Though Jo Biden continued with the tariffs after Trump’s first term, there has been a realisation that the battle between China and the US for the position of the worlds superpower has moved into another stage. If the Trump threat of tariffs of sixty percent proves true, then Russia and the rest of the world will be feeling the consequences in more ways than expected.

With Russian oil flowing into China and India, there is a realisation that both economies are being underpinned by cheap oil. Though China exports a lot more to Russia than India, there is also a realisation that the economies of these states are going to be dependent on the Russian current account having the reserves in US$ to manage the cross border trade that will be taking place. Though China and Russia are dealing in Yuan as well as dollars, their economies are not evenly balanced and the trade deficit will only grow as the price of oil drops further when Trump comes into office.

There are very few analysts who do not think that the US is moving into a period of growth through tax cuts, but it is Trump’s arguments which are pushing the markets even further into the bull zone. Whether the US is capable of the growth that Trump believes is in the market, his argument that the US dollar must be strengthened, oil prices to drop and interest rates to drop, challenges conservative thinking on how an economy should be managed. The arguments of deficits sits heavily with the bear market pragmatists especially with the idea that interest rates must drop, oil must flat line at a lower value if Trump is to get inflation down, even with tax cuts.

But these arguments are theoretical at the moment as Trump has not entered into the presidency yet. The US market is booming at the moment and the industries that are inflated are the industries that will benefit from the tax cuts and tariffs, which means high tech and though China produces technology that is critical to the Russian war machine, the question of whether it will continue to supply the technology the state is so dependent on if the balance of payments continues to arc in the direction of the state.

Russia is in a period of uncertainty as the war in Ukraine continues to drain the state. The artificial growth Russia is experiencing is at the expense of the economy. Though Russia has growth in areas that had been previously neglected, it is the war in Ukraine that is fuelling that growth. Though the growth is artificial and places pressure on the Central Bank, the government is pushing to keep the spending as it is though the budget is challenged by the reality on the ground. Industrialists are demanding that interest rates drop to fifteen percent, but this would lead to hyper inflation and an economy that is out of control. Whether Putin will listen to his industrialist who are struggling challenges the Russian state and its future, but if there is to be a peace in Ukraine, which Russia can be a signatory too and a détente where Russian oil and gas is once again flowing into Europe, then Russia will have escaped a trap that it set itself.