Russia might be its own worst enemy at this point.
The government’s continued involvement in the ongoing Ukraine political crisis is hurting the economy, and pushing the currency back to its March 15 low of 36.58. On Tuesday, the currency settled at 36.20 to the dollar as violent protests continue in the city of Donetsk near Ukraine’s Russian border.
Russia’s economy has been in the cross hairs now for over a month thanks to the Ukraine affair. On March 16, Ukraine’s Crimean peninsula voted to secede and become part of Russia. Donetsk is asking for the same thing. It’s like the children are siding with one parent and leaving the other one bitterly angry. And with salivating lawyers in Washington and Brussels looking to help the betrayed Ukraine.
Almost daily now, pro-Russia and pro-Ukraine activists are clashing in the far eastern regions of the country, sparking Russia’s Vladimir Putin to say Tuesday that Ukraine risks falling into a civil war.
RT reported today that Putin told German Chancellor Angela Merkel via phone that the escalation of the Ukraine crisis was a result of Kiev’s “irresponsible politics”, which put ethnic Russians at odds with the capital.
Russia’s economic generals are busy in the war room.
The Bank of Russia announced on Friday that it will keep the volume of accumulated currency interventions at $1.5 billion, while shifting the ruble trading window by 5 basis points, according to the bank’s website. The Central Bank uses a euro-dollar basket as an operational benchmark for its exchange rate policy. Its range of permissible values are given in a floating corridor, with limits adjusted to reflect how much the country has in its foreign reserves. Russia has around $486 billion in international currency reserves, but that is down from $493 billion in March and $522 billion back in October as the country tries to save the ruble from capital flight during the crisis.
Russia’s financial sector is stable, Russian Prime Minister Dmitry Medvedev said in a meeting with finance officials in Moscow today.
“We are in a very uneasy situation indeed, that’s why we need to make some allowances,” he said about Central Bank actions in the last three days. ”On the whole, we think the situation of the financial system of our country is absolutely reliable and under control,” Medvedev said.
Stress tests released by the Russian Central Bank earlier this month showed banks could handle even the most extreme economic stress. The pessimistic scenario assumes a 1.2% contraction in GDP and 20% devaluation of the ruble, against the backdrop of a general global economic slowdown, including a 25-30% decrease in oil prices. The worst-case scenario assumes a 5% contraction of GDP and a 30% devaluation of the ruble.
Russia’s equity market has been surprisingly resilient over the last month, but is now on the wane. The Market Vectors Russia (RSX) exchange traded fund, for instance, is up 1.4%. That’s not bad, but it’s still far below the benchmark MSCI Emerging Markets Index which is up by more than 7%.
Investors are not too keen on Russia as it is and Ukraine is not helping. Add U.S. sanctions to the mix since Crimea’s annexation and the outlook is indeed foreboding.
So far, sanctions have been targeted to Russian officials and a handful of banks — namely those owned by the Rossiya Group.
Medvedev thinks his country is facing an “artificial crisis”, one that is more rhetorical than fundamental. That may be the case, but perception is often the enemy of reality.
Russian Finance Minister Anton Siluanov, who accompanied Medvedev in his talk with finance officials, blamed the weak ruble on capital flight associated with Fed tapering and not Ukraine.
— The Market Vectors Russia ETF plays one of the worst performing equity markets in the world.
“The capital outflow that remains is lowering the ability of investments in the economy to grow and is creating a risk of an unbalanced budget,” Siluanov said. Some $63 billion of capital exited Russian in the first quarter, including $20 billion of rubles being replaced by dollars and euros in private Russian bank accounts.
For investors, Russia’s weak ruble and weakening stock market is because of Ukraine not the Fed.
As a result, the Russian Economic Development Ministry increased its estimate of capital flight to $100 billion from a previous estimate of $25 billion in 2014.
The Ukraine crisis has sparked the greatest geopolitical showdown between Russia and the West since the Cold War.
The crisis started late last year when Russia friendly president Viktor Yanukovych rejected a trade deal with the European Union. Millions of Ukrainians protested in Kiev calling for his ouster. Yanukovych was removed from power on Feb. 22 by extra-legal means and immediately replaced by Western friendly politicians led by Prime Minister Arseniy Yatsenyuk. The PM’s first order of business was to ban the use of Russian language in official communications, irking over a million Crimeans who voted to secede on March 16. At least two east Ukrainian cities heavily populated by Russians are asking to leave Ukraine or become autonomous republics within Ukraine.