As Allahpundit mentioned here, the Russian economy is in dire straits. The Russian stock market remains closed for the 4th day in a row and the value of a ruble remains below one US cent. Russia’s Tass news agency reported today that the exchange rate of the ruble against the dollar and the euro reached an all-time high:

The dollar and euro exchange rates hit all-time highs again on Moscow Exchange on Thursday as the dollar reached 118.35 rubles, while the euro – 125.065 rubles during the trading.

On top of this, Moody’s Investor Service today dropped its credit rating of Russian debt to junk status.

Moody’s Investors Service dropped its long-term debt rating for the Russian government from Baa3 to B3 — a six-notch freefall that leaves Russia’s credit firmly in the “junk,” or non-investment grade status.

Moody’s also downgraded the Russian ruble in its short-term ratings, to “not prime.”…

By dropping Russia’s rating to a B3, Moody’s is placing the country in the same credit risk category that currently includes Ukraine.

The fact that Russia’s credit rating is now no better than Ukraine’s, a country that is currently under assault by columns of tanks, really does say something about how severe these sanctions are.

Of course the Russians are doing their best to keep the economy from collapsing but the extent of the sanctions has made that difficult. There’s a really simple explanation at this site of the two things the Russian central bank has so far tried to prop up the ruble.

Normally, currency values flop around, like the price of fish. That’s what’s called a free-floating currency — it just bobs around based on supply and demand.

But there are things countries do to manipulate supply and demand for currency, therefore manipulating the price. One thing is raising interest rates.

“When interest rates are higher relative to one country, it becomes an appealing destination for capital to flow there,” Vecchio explained…

“In recent days, the Central Bank of Russia has doubled rates from 10% to 20% and is desperately trying to stabilize the value of the ruble,” Vecchio said.

That obviously hasn’t worked, in part because US and EU sanctions mean the ruble is off limits to most foreign investors. The other thing countries can do to stabilize their currency is to use cash and gold reserves to buy it up and thereby increase demand. But Russia’s central bank can’t do that either because sanctions have also frozen the majority of the bank’s reserves, most of which were actually being held in foreign banks in the US and EU. Russia’s central bank has whatever it had on hand in Russia plus about 13% of its total reserves which were in China. China hasn’t sanctioned Russia so those assets are still available.

The result of all of this is a currency that no one wants. Russians have been doing their best to avoid rubles by waiting in long lines to take out hard currency in dollars to avoid seeing the value of their money drop. The BBC posted a clip of people lined up for an ATM in Moscow earlier today. “One man hunting for euros or dollars told the BBC that he had tried seven different cash machines,” the video’s caption states.

Having a currency that no one wants creates a surplus which fuels inflation. Today, economist Steve Hanke, who specializes in measuring real inflation rates, estimated Russia’s annual inflation rate has already hit 61 percent.

The value of the Russian ruble has been TORPEDOED by conflict with Ukraine, fueling inflation in Russia. Today, I accurately measure inflation at 61.52%/yr using high-frequency data & purchasing power parity (PPP) principles. The inflation tax will crush anyone holding rubles. pic.twitter.com/hKKkrKgQhE

— Steve Hanke (@steve_hanke) March 3, 2022

Of course it has only been about a week since the invasion started so very little of this annual inflation rate has been felt on the ground. But at 61.5%, that’s steep enough that regular people are going to start to feeling it every month. And with every indication that Putin will continue his invasion of Ukraine until it reaches some kind of (temporary?) military success, there’s almost no chance the sanctions will be retracted. On the contrary, this is probably just the start. There’s no telling what the real world rate of inflation in Russia could be in another month.

Remember the hyperinflation we witnessed in Venezuela? People were starving to the point that they were eating animals from the zoo. The currency was so devalued that local merchants began weighing the stacks of bills rather than counting them. I’m not saying things will get that bad in Russia but you really never know. Early on, middle class Venezuelans were crossing the border to go shopping with huge bricks of Venezuelan currency. Even then I was asking myself why they didn’t try to get out of the country given the direction things were clearly headed. And when things did get worse, millions of people did eventually flee Venezuela, some of them on foot because they’d already lost everything just trying to stay alive.

Again, it’s still early but we’re already seeing some Russians fleeing the country out of fear about the economy and what comes next:

Alexei Trubetskoy knew he had to get out the moment he woke up and looked at his phone on the morning of Russia’s invasion into Ukraine.

“I got up, checked the news in disbelief and realized I had to leave as soon as I can,” he said. Trubetskoy, who runs an English language school in Moscow, bought a ticket to Sri Lanka on the same day.

“It was clear to me that the horrible invasion will change Russia forever.”…

Google analytics showed that the word “emigration” saw a spike in searches over the last week while countless Telegram channels have been set up in which worried Russians are discussing ways to leave the country.

What does come next? There are rumors that the Russian government might be ready to institute martial law as soon as tomorrow.

The Kremlin has said it is not planning to institute martial law in Russia as rumours have spread that the government is preparing for a clampdown tied to its invasion of Ukraine.

Thousands of Russians have begun fleeing the country amid unsourced reports that the borders could close as soon as this weekend after an extraordinary session of the Federation Council, Russia’s upper house of parliament, scheduled for Friday.

The body often signs off on major foreign policy and security decisions and recently gave Putin the authority to use his military overseas before the invasion of Ukraine.

The EU has acknowledged seeing those rumors on social media. Granted, those rumors could be disinformation being spread by Ukraine and other western sources. Then again, western sources were right about the invasion even when Russian sources were denying it would happen. Tatiana Stanovaya is the founder of a political firm called R.Politik. She tweeted yesterday that she doesn’t think martial law is so far-fetched.

THREAD. The Federation Council will hold an unscheduled meeting on March 4. A lot of people are now writing that the purpose of this meeting is to adopt anti-crisis laws. But there is another possibility – the approval of martial law.1/5 https://t.co/y7U9OjnZzq

— Tatiana Stanovaya (@Stanovaya) March 2, 2022

to ban all rallies and meetings, to ban the work of public, international and foreign organizations that undermine the security of the country, and so on…3/5

— Tatiana Stanovaya (@Stanovaya) March 2, 2022

… (because it is more expensive and time-consuming to do it piecemeal), to catch everyone who is writing or saying undesirable things, and to put restrictions on movement.5/5

— Tatiana Stanovaya (@Stanovaya) March 2, 2022

Rather than sending police out to arrest protesters (about 7,000 have been arrested so far) martial law would be a more efficient way to clamp down on any internal resistance. Putin may have military boots on the ground in Moscow and Kyiv at the same time.