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Aug 1, 2022
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Default, hyperinflation, collapse of the ruble: risks of August 2022

August has long become for Russia a kind of symbol of catastrophes and political upheavals. Their countdown, if desired, can be started at least from 1914, when the First World War began. But in the memory of the older and even the middle generation, rather the turbulent events of the “dashing 90s”, when almost every August turned into either a default, or a coup, or an economic crisis, or a man-made disaster … We decided to find out what “surprises” we could look forward to next month.

But first, a brief chronology. August 4 – 1994 arrest of Sergei Mavrodi, the collapse of the largest financial pyramid “MMM”. Hundreds of thousands of fellow citizens suffered, who, in the pursuit of profit, sold their apartments and bought up “Mavrodiki”.

A year later, on August 24, “black Thursday”: as a result of the banking crisis, rates rose to 2000% per annum. The ruble exchange rate collapsed, price tags in stores began to be written not in domestic currency, but in USD, which meant the dollar exchange rate.

Three years later, in 1998, there was a default: 40% of the population fell below the poverty line in a matter of days, salaries were cut by two-thirds, imported goods rose in price by up to 400%….

If we throw a bridge from those days to ours, then, probably, August 29, 2018, when Vladimir Putin gave the go-ahead to raise the retirement age for Russians, can be recorded in a series of economic shocks. Which, in general, also had a negative impact on social well-being.

A separate block is other important events, which, alas, also took place in August. These are significant man-made disasters, the beginning of military conflicts, air and sea disasters…

In general, a series of ominous associations does not allow you to relax on the eve of the upcoming August – especially against the backdrop of the current tense geopolitical situation and the “war of sanctions”. The networks are full of horror stories about the default, which we either announced or is about to announce due to non-payment of Eurobond obligations. And even about hyperinflation, which will inevitably come in the current economic situation. Scary, creepy…

Well, if these shocks happen, then of course in August, when else!

But still, in order to assess the likelihood of these events, we preferred to turn not to social networks “hot” from rumors, but to an expert – Doctor of Economics, chief researcher at the Institute of Economics of the Russian Academy of Sciences Igor Nikolaev.

– On the eve of the approaching August, many people are afraid of hyperinflation – they say, it is not without reason that the Central Bank started updating the design of some banknotes: you see, some of them will completely go out of circulation … In your opinion, is this real?

Such a scenario is absolutely out of the question. We have a strong ruble and a strong balance of payments. Oil and other energy prices have risen. Although their deliveries in physical volume have declined, there is enough currency from exports. Plus, there is our requirement for other countries to pay in rubles. A strong ruble is one of the reasons for the still stable economy, despite the strongest sanctions.

Other factors also play a stabilizing role. For example, a seasonal decline in prices for fruits and vegetables or a restriction on the export of metallurgy and woodworking products. As a result, more raw materials enter the domestic market, which keeps prices down and slows down inflation.

An important factor is the decline in consumer activity of the population. In the last review, the Central Bank drew attention to this. If demand decreases, producers and sellers do not raise prices.

What kind of hyperinflation are we talking about? Yes, the current inflation at the end of the year will be quite high, within 15% per year …

— And at what values ​​does hyperinflation begin?

— At astronomical. Classic – from 50% – and not for a year, but for a month. In 1992, 2,500% per year was “shifted” across the country. Or remember the default of 1998, when our ruble depreciated almost three and a half times in a month – from 6 rubles to 21 per dollar.

– Some analysts don’t expect anything good from the default that they are trying to announce to us today because of Eurobonds. Parallels are drawn with the August 1998 default.

Yes, it’s been 24 years…

– And the older generation remembers like yesterday, all those lines at bank cash desks, the sharp fall of the ruble, the convulsive rewriting of price tags in stores … Is it appropriate to compare the current situation with those events?

I don’t see anything in common. In 1998, the government of Russia itself declared a default, it refused to fulfill its obligations on the public debt. Now our country does not recognize it, and even if the West announces it, it will challenge this decision in the courts. Everywhere we emphasize that we can pay off Eurobonds, but we are not given such a technical opportunity. What is the true truth and in the world it is well understood. Even if there is a recognition of default and the case goes to the courts, Russia has every chance to prove that there was no real default, it was provoked by external forces – you know what.

– But imagine that a default is announced, it will become a reality. What will change in our lives and in the country’s economy?

– At the same time, we will not notice it at all, nothing will happen. It’s a long story, it has to go through all the stages, cross-defaults. Investors have an understanding that the default is organized by unfriendly states, Russia is simply not given the opportunity to pay. The showdown can drag on for months, if not years. I repeat: the case will go to the courts, and this is still a big question – whose side will Themis take, we have a strong position.

— What will happen to the ruble in August? Will he collapse?

– In no case. Our national currency has a strong base, which I have already mentioned. It will weaken, which we see today, the dollar now costs not 50 rubles, as a month ago, but 60 with a “tail”. The Federal Reserve System in America raised the rate, which means that the dollar will strengthen, which automatically leads to a weakening of the ruble. But there will be no crashes.

There is every reason to believe that this August will not bring us any economic shocks. Let’s hope that lockdowns due to the coronavirus pandemic will not happen, the country will work as usual. Although the situation in the Russian economy is unlikely to improve. But this is not August news…

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