Russia`s sinking ruble threatens global ripples

Author: us-russia
Comments: 0
Russia`s sinking ruble threatens global ripples
Published 21-12-2014, 08:42

Josh Boak

The Associated Press

WASHINGTON — Russia's suddenly escalating financial crisis risks spilling beyond its borders and endangering parts of the global economy.

With economies in Europe, Japan, China and Latin America already ailing, fresh threats have emerged from Russia's shriveled currency, its move to dramatically boost interest rates, the damage from plummeting oil prices and Western sanctions over Russia's action in Ukraine.

The alarming 10 percent drop in the ruble in the past two days has amplified the economic turmoil in Russia. Investors fear that Russia may default on its foreign debt obligations — a move that would inflict hundreds of billions of dollars in losses on lenders abroad.

Some analysts also worry that tensions will further escalate between Russia and the United States and its European allies that imposed the sanctions. The White House upped the pressure Tuesday when President Barack Obama committed to approving additional sanctions.

Few see President Vladimir Putin backing down.

"I do not expect him to blink," said Ian Bremmer, president of the Eurasia Group, a political risk and consulting firm.

The financial consequences for the United States could be modest because of Russia's diminished economic stature. Yet the geopolitical risk could ripple across continents.

Russia began the year as the world's eighth-largest economy, with a gross domestic product of $2.1 trillion, according to the World Bank. A single ruble is now worth less than two pennies, having lost about 50 percent of its value against the dollar since January.

This means Russia's GDP has been halved in dollar terms, putting it roughly on par with Mexico and Indonesia as the world's 15th-largest economy.

Before financial markets opened Tuesday, the Bank of Russia hiked its key rate to protect the ruble's value. In doing so, the bank hopes investors will find it more financially appealing to keep their money in Russia. Nevertheless, the ruble fell in trading to close Tuesday at 80 rubles to a dollar, compared with 65 on Monday.

Russian officials have projected that their economy will shrink nearly 5 percent next year.

Russia imports about $324 billion of goods annually, primarily from China, Germany, Ukraine, Belarus and Japan.

Those imports have grown costlier because of the falling ruble.

One potential global risk comes from Russia seeking to retaliate against the sanctions by increasing cyberattacks against U.S. targets and asserting itself more aggressively in Ukraine and other nearby countries, Bremmer said.

Western sanctions

On Tuesday, Russian Foreign Minister Sergei Lavrov argued in a French TV interview that the sanctions were intended to end Putin's regime.

Isolated and alone, Russia might then choose to default on some of its debt.

"Our deepest fear has been — and still is — that putting Mr. Putin in a 'nothing to lose' situation removes any constraint he might have had against reneging on his foreign debt obligations, which Russian borrowers probably cannot pay off or service now," writes Carl Weinberg, chief economist at High Frequency Economics.

For months, the U.S. and European Union have sought to enact sanctions against Russia in tandem. But Europe, which has a far broader economic relationship with Russia than does the U.S., largely has reached its limit for enacting broad sanctions against the Russian energy industry and other key economic sectors unless the Kremlin ramps up its actions in Ukraine.

However, in an apparent attempt to maintain some Western unity as Obama signs the legislation, a Western diplomat said the U.S. and EU were preparing similar packages of trade and investment bans in Crimea, the strategically important peninsula Russia annexed from Ukraine this year. Those penalties could be announced in the coming days, according to the diplomat, who was not authorized to discuss the pending action publicly and insisted on anonymity.

Ukraine action

Kremlin-backed rebels began occupying cities in eastern Ukraine, near Russia's border.

The West has accused Russia of supplying and supporting the rebels.

Russia analysts say it's unlikely Putin will shift his calculus on Ukraine solely because of sour economic indicators or another round of sanctions.

But Matthew Rojansky, a scholar at the Wilson Center, said that if the currency crisis starts hurting the Russian public's ability to buy food or heat homes, Putin could be forced to act in order to stem a political crisis.

"The logic is not that Putin is going to be persuaded suddenly that he's wrong," Rojansky said. "What is going to happen is the ground is going to shift under Putin."

Comments: 0