HIGHER RATES, LOWER PROSPECTS….

The markets have noticed the political changes, and the markets don’t like them. In the last week of January, stocks lost about 20% of their value while bond prices fell and yields soared. Interest rates are now over 40%, the highest in the world. Watching the political news, investors are increasingly concerned that Russia will not solve its fiscal problems. High interest rates may not be enough to attract foreign money to an environment seen as risky and growing riskier. A cycle of falling markets, rising rates, and unfunded deficits could force a devaluation of the ruble. That would put the Russian economy on one of two paths: recession and stabilization at a lower level of activity, or inflation and growth followed by a deeper collapse later on.

Despite a $30 billion trade surplus, Russia is short of capital. Government officials complain about the lack of foreign investment, but the flight of Russian capital out of the country is a much bigger problem. A report by investment bank