Russian markets nosedive as Ukraine panic takes hold

MOSCOW — Investors in Russia reacted with panic Monday to the potentially disastrous economic consequences of Russian military intervention in Ukraine, with Moscow stock markets crashing up to 12 per cent and the ruble plunging to historic lows against the dollar and euro.

Russia’s central bank hiked its main interest rate in an emergency move to stem capital flight and the losses for the ruble, amid what risks becoming at least Russia’s worst economic crisis since 2009.

President Vladimir Putin on Saturday had won approval from Russia’s upper house for the sending of troops to Ukraine due to the stand-off in Crimea following the ousting of pro-Moscow president Viktor Yanukovych.

Economists warned the move risks creating a litany of further trouble for the Russian economy, which is already battling chronically slow growth.

Russia faces becoming an international economic pariah, with US Secretary of State John Kerry already warning Putin that Moscow faces losing the right to host the Group of 8 this year in Sochi and could even be expelled from the group of top nations itself.

Military intervention would drain further resources from a Russian budget already stretched by costs like the Sochi Olympics, alarm already nervous investors, limit Russia’s economic ties with the West and force Russian companies into huge write-offs in Ukraine.

“Sochi was already expensive. Military adventures and strained relations with the West can be much more expensive than that,” said economist Holger Schmieding at Berenberg Bank in London. “Russia cannot afford that in the long run.” 

Kerry himself gave a bleak assessment of the consequences for Russia, saying Putin may be hit by “asset freezes on Russian business, American business may pull back, there may be a further tumble of the ruble”.

Black Monday 

The MICEX stock market in Moscow was trading down 10.94 per cent while the RTS bourse had fallen by 12.03 per cent at around 1320 GMT.

It was also a Black Monday of carnage on the stock markets for some Russian blue chip shares.

Stocks in Russian gas giant Gazprom — which has a huge contract to export gas to Ukraine as well as banking interests in the country — fell 12.5 per cent. Russia’s biggest lender Sberbank was down 15.57 per cent.

The ruble has already been under major pressure in recent weeks due to investor nerves about emerging markets and Russia’s flimsy medium-term growth prospects.

But the Ukraine crisis Monday pushed it to levels not seen even in Russia’s 2009 financial crisis that followed the collapse of Lehman Brothers and the Georgia war.

The ruble plunged in value to trade at 50.22 rubles to the euro. On Friday it stood at 49.58.  

It was a similar story with the ruble/dollar trade, with one dollar worth 36.45 rubles. At close of play on Friday it was 36.28.

The Bank Rossii (Bank of Russia) raised its main interest rate to 7 per cent from 5.5 per cent in a clear bid to support the ruble and stem an already alarming capital flight amid the tensions between Russia and Ukraine.

“The decision is aimed at averting the appearance of risks for inflation and financial stability linked to the increased volatility on financial markets,” it said in a statement, adding the hike would take effect from 0700 GMT Monday.

Deputy Economy Minister Andrei Klepach admitted the decision was linked to the “hysterical situation” surrounding the pressure on the ruble.

The decision “is a clear attempt to stem outflows of capital from financial markets following the escalation of the crisis in Ukraine”, said Neil Shearing, chief emerging markets economist at Capital Economics. 

‘Worse than after
2008 war’ 

The economic consequences of intervention in Ukraine risk becoming a huge headache for Putin and have parallels with the 2008 war with Georgia over the region of South Ossetia, which fed into Russia’s 2009 financial crisis.

However the magnitude of the Ukraine situation means a Russian economic crisis in 2014 could be even more serious.

“Unlike the five-day war in South Ossetia, we are concerned that the tensions in Ukraine will very likely last considerably longer, having a prolonged negative effect on Russia’s economic environment,” economist Natalya Orlova at Alfa Bank said in a note to clients.

She added that not even the current depreciation of the ruble would support Russian gross domestic product while several Russian banks were hugely exposed to Ukraine.

Before 2009, Russia had enjoyed stellar average annual growth rates of 7 per cent under Putin’s rule. But with growth of just 1.3 per cent in 2013, economists now warn it risks being trapped in a cycle of low growth. 

Separately, the Russian central bank still has “lots of room” to raise interest rates and can further increase its involvement in the domestic foreign exchange market to stabilise the ruble, Central Bank First Deputy Governor Ksenia Yudayeva said on Monday.

“We still have lots of room to raise interest rates ... and we can further increase our presence in the currency market,” Yudayeva said in an interview on the Rossiya-24 news channel.

The central bank said on Monday it had raised the interventions allotment to be exhausted before it shifts the ruble’s trading corridor — to $1.5 billion from $350 million — and that it will decide daily on the currency’s trading policy.

“Due to increased volatility in the domestic foreign exchange market, the Bank of Russia moves to daily determinations of the parametres of each exchange rate policy, which will be based on an assessment of the current situation,” the central bank said in a statement.

“This measure was taken in order to prevent risks to financial stability by limiting exchange rate fluctuations,” it added.

The central bank keeps the rouble in a target exchange-rate corridor, which as of Friday extended from 35.40 to 42.50 rubles to the dollar-euro currency basket.

Under its managed float, the central bank increases its interventions as the ruble approaches the boundary of the corridor. Monday’s decision mean that it will automatically shift the corridor only after an intervention allotment of $1.5 billion is exhausted.

Traders said the central bank had spent at least $10 billion on Monday to prop up the ruble.