Apple Abandons Russia; Ruinous Ruble Run Sees 25% Inflation in a Single Day

Bloomberg News is reporting that Apple, Inc. (AAPL) has halted sales in Russia, once one of its most promising growth markets.  The move is the latest indication that Russia’s economy is in dire trouble.

I. Highway to Hell

Apple has been operating in Russia since 2007, according a 2012 report from Russian state news agency, RT.  After exploring expanding into a brick and mortar presence in Russia last year, Apple held off instead opting to open an only storefront, offering direct sales to Russian customers.

Apple’s Russian online store has shut down amidst the country’s economic crisis.
[Image Source: Apple Insider]
Now it’s fled the Russian market, amidst Russia’s worst economic crisis of the post-Soviet era.

Signs of trouble began last year when Russian President Vladimir Vladimirovich Putin began to clash with America’s President Barack Hussein Obama II (D), particularly on the topic of Ukraine, where America backed western Ukrainians who overthrew their supposedly “corrupt” elected government in a coup.  Russia, meanwhile backed eastern Ukranians rebels who expressed public desire to rejoin, or at a minimum remain close to Russia.

As the debate over Ukraine grew rancorous, each leader accused the other of spying and economic manipulation.  In the U.S. some Russian assets have been frozen or seized under U.S. “sanctions”.  Russia has fired back, unleashing similar sanctions against America’s technology sector and subject American tech firms to rigorous new regulations.

President Putin boldly defied the U.S. over Ukraine and international spying.  Now his regime is paying the price. [Image Source: AFP]
While the battle has been harmful to both countries economically, to some extent, it’s becoming apparent that Russia has been hit far worse than the U.S.  Perhaps most impactful has been the plunge in crude oil prices, one of Russia’s most lucrative exports.  Putin and fellow Russian politicians have accused Saudi Arabia and the U.S. of conspiring together to break the Russian economy by plunging oil prices to low levels not seen in years. 

II. Russia Can’t Print Rubles Fast Enough to Escape Its Debt, Inflation

But whether the accusation is true or not, as the bottom line is Russia’s economy is breaking.  In recent months prices per barrel of crude Brent oil have fallen from around $110 USD in June-July.

[Image Source: CNN Money]

[Image Source: BG Keithley]

Now with oil trading at under $60 USD per barrel — nearly half as much as it was worth less than half a year ago — Russian is plunging deep into the red.  The value of the Ruble, Russia’s state currency, has plunged.  Today rubles are worth less than half as much versus America’s dollar as they were twelve months ago.  In July-Sept. alone, the currency fell 14 percent in value against the dollar — the worst fall the currency has seen in a quarter since 1999.

Apple and other U.S. manufacturers are pulling out of direct sales over fears that the worst is far from over.  While they begrudgingly dealt with Russian sanctions during Putin’s spat with Obama over Ukraine, for companies like Apple, at the end of the day it’s about profits.  And with fears high that the ruble may soon be devalued to the point of being worthless, Russia has been too large a risk for American OEMs to take.

And they’re not alone.  Russia’s own business leaders withdrew $61B USD in investment from their home country in 2013, as problems began to heat up.  This year, the flight of money from Russia is expected to hit over $100B USD, the highest capital loss since 2007.

A panicked Putin has sent out a fair deal of conflicting signals.  He recently committed to tapping Russia two “rainy day” funds to prop up his country’s largest banks, which are on the verge of default, unable to keep up with their debt obligations amid the devaluation of the Ruble.  Billionaire oil magnate Igor I. Sechin (owner of Rosneft), one of Putin’s most crucial allies, convinced the Russian leader to approve a central bank plant to print billions of new Rubles to cover his company’s debts.

But that move only further destabilized the currency, which on Tuesday went from trading at 64 Rubles per dollar to trading at 80 Rubles per dollar — a stunning 25 percent inflation in just a single day.  Such a run has seldom been seen in the modern era, bringing to mind the hyperinflationary economy in post-WWI Germany (1921-1924), an economic crisis which would help the Nazi Party rise to power and, in turn, eventually lead to the Second World War.

Russia is printing more Rubles, but can barely keep up with debt. [Image Source: EmergingMoney]
And while Putin’s regime may be able to dig deep enough into their pockets to cover the $30B USD in debt obligations that are coming due this month, 2015 looms ahead dangerously, with $130B USD in debt obligations to come due over the course of the year.

Even as it prints money to try to placate its wealthiest powerbrokers, Russia also committed to a massive hike to interests rates, which hit 17 percent on short-term debt.

III. Electronic Hoarding Commences; Opposition Leaders Grow Bolder

The skyrocketing interest rates are putting immense strain on Russia’s small businesses.  Many Russian small business owners have already gone under, and many more still may be bankrupt within months.  Professor Natalia V. Akindinova of Russia’s Higher School of Economics (HSE), one of its largest and most prestigious economic research universities, warned of dire consequences to the economy.  She stated in a comment to The New York Times:
We are seeing an economic crisis.  We are seeing a sharp devaluation of the ruble at a time when the central bank doesn’t have the reserves to influence the market, as it did in the past crises.
Some are making hay amidst the ruin.  Putin’s political rivals, after being beaten down, harassed by state police, and marginalized for so many years, are seeing a resurgence as public animosity against Russia’s long-standing leader grows.  

Opposition leader and former deputy PM Boris Nemtsov is leveraging Russia’s economic collapse to consolidate opposition against the once seemingly unbreakable Putin regime. [Image Source: Facebook]
Boris Y. Nemtsov, a former deputy prime minister who has had a falling out with Putin has become among the major voice of opposition lambasting the Putin regime’s woes and its response to the crisis.  He comments on Facebook Inc.’s (FB) social network (translated by Bing):
The dollar and the euro [trading values] today [versus the Ruble] are judgments [against] Putinism. Krymnašisty and supporters of war with Ukraine must recognize that their support [of] a paranoid liar and thief [has] brought the collapse of Russia’s economy and financial system.

Find the courage to do it. Don’t be afraid to say that you were wrong and that you will not [continue to] support this monster [Putin].  [You must] defend [both] Russia’s interests and [your own].
It wuld be seemingly insane to voice such sentiments just a few years ago.  But as Putin’s grip weakens, his rivals are growing bolder.

Apple has puleld the plug on its dedicated online storefront, ending its flirtation with the Russian market for now.  [Image Source: RIA Novosti]
But to American electronics companies Russia’s malaise is merely more bad news.  With residents of major Russian cities like Moscow buying up and hoarding electronics amidst the expectation of further devaluation of the Ruble, Apple may be the most high profile American corporation to abandon sales in the region (for now), but it is assuredly not alone.  

Buyers in Russia hoarde electronics, fearing further drops in the Ruble.
[Image Source: The New York Times]
Russia’s economy is ablaze and American companies aren’t eager to stick around to see whether it collapses.