The Russian crisis and its impact on the financial markets

Vladimir Putin

Russia's economic situation has continued to deteriorate since its support for the Ukrainian insurrection, which was later exacerbated by its compulsory annexation of the Crimean peninsula, the seat of its navy base on the Black Sea.

The reaction of the West, although slow, was progressive imposing serious economic and financial constraints on the Russian economy: cancellation of loans, prohibitions of foreign trade, blocking personal accounts and state companies, among others. These measures provoked a high degree of uncertainty, which caused falls in levels of activity, capital flight, devaluation of the ruble, the increase of inflation and, consequently, of poverty. All this, coupled with a pronounced decline in the stock market.

In spite of all this, Putin's government reiterated its expansionist 


intentions by expressly stating that the fall of the Union of Soviet Socialist Republics (USSR) had been the main mistake of the last century. These statements merely aggravated the situation, thus deepening the problems mentioned in the previous paragraph.

Finally, a new and severe blow came. Nothing less than a brutal fall in the price of oil of 45% (from $ 100 per barrel to about $ 55) in the last five months; but with a severe acceleration of the fall during the last 30 days. Why does this decline seriously affect the Russian economy? Very simple: 40% of your tax revenue comes from taxes to the energy sector; consequence: increasing issuance to finance public spending and higher inflation.

The only response from the Soviet authorities was only a timid and inoperative reduction of transfers to state governments and a restrictive monetary policy. In effect, as of April this year, the central bank's reference rate was around 5%, which was gradually brought to 10.5% until last Monday. The situation has deteriorated so much that at dawn on Tuesday - at an unscheduled meeting - the Central Bank took an unprecedented step: it raised its benchmark rate to no less than 17%; level that did not take place since the Great Recession 2008/2009. The immediate reaction was a recovery of the value of its currency; however, the market quickly returned to play against it: a few hours later it fell again

For the purpose of quantifying the scenario, the following are the main data that reflect the seriousness of the scenario:

* GDP : it is estimated a fall of 2.5% in the fourth quarter and a recession in 2005 not less than 4% 

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* Capital flight : during the current year, it is in the order of 80.00 million dollars; with initial reserves of 300,000 million 

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* Ruble devaluation : more than 55% so far this year 

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* Loss of market value over 50% , coupled with sharp falls in the parities of its sovereign and private bonds 

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* Inflation and public deficit growing

* Foreign trade drop of 15% (prior to the drop in oil)

It should be clear, then, that the factors that have led the Russian economy to its complicated current situation have been the following: foreign policy errors with the corresponding Western economic sanctions, the late reaction in the implementation of countercyclical macroeconomic measures and a low of its main export product.

However. What are the impacts of this crisis of the Russian Bear on the world economy in general, and on the one of our country in particular?

Regarding world markets, the uncertainty regarding a possible default quickly expanded, resulting in a classic "flight to quality"; ie capital outflow from risky financial markets and simultaneous search for safe haven in assets considered safer especially US Treasury bonds. This money flow has resulted in stock market crashes and capital flight from emerging markets, with the corresponding devaluation of their currencies.

With regard to our country, obviously, the previous scheme of falling assets and capital outflow mentioned above has been repeated.

However, by the decision of the Central, here we have not allowed our currency to devalue accompanying the rest of the emerging countries. 

This imbalance - a negative byproduct of exchange control - makes our economy lose competitiveness, with all the negative consequences that this implies for the external sector.

One last comment. At yesterday's meeting, the US monetary authority (Fed) explicitly ratified its position that it will keep the benchmark interest rate at its current minimum value (0.0% / 0.25%) "for a considerable time ". In addition, the President's statement - Janet Yellen - added that the Russian crisis will have very little impact on the US economy and will therefore not affect its current strength. Both data kept the markets calm, which reversed their negative trend. It is to be hoped, then, that the central economies support the attitude of the United States, in order to avoid the repetition of a new "vodka effect". Otherwise, it would increase the likelihood of a Russian sovereign debt default; a fact that would result from extreme gravity for the stability of the global economic and political system.