Image credit: Flickr/poniblog

Putin faces the music as the rouble tumbles

As the rouble slides, investors are beginning to wonder whether there's any point in emerging markets any more.

by Emma Haslett
Last Updated: 04 Mar 2014

If Vladimir Putin was under any illusion investors are impressed with his Ukrainian muscle-flexing, it’s just been shattered: Russian markets are crashing as investors flee in their droves, with the rouble dropping 2.9% (at the time of writing) and Russia’s benchmark index, the MICEX, falling 9.1% in early trading.

Here’s a helpful visual aid, courtesy of Bloomberg:

Among the worst fallers are Sberbank, Russia’s state lender, which fell by 9.8% and  Gazprom, the world’s largest extractor of natural gas, which fell 10.7%. Suddenly, BP’s experiences in Russia – it was effectively muscled out of its Russian joint venture at the end of 2012 – looks like rather good luck (although it does still have some exposure in the country).

Early this morning Russia’s central bank hiked interest rates by 1.5 percentage points in an effort to halt the rouble’s descent, saying it wanted to ‘prevent risks to inflation and financial stability associated with the recently increased levels of volatility in the financial markets’. Which rather ignored the Ukraine-shaped elephant in the room, but there you go.

As well as all the external political pressure there is internal political pressure to come up with a swift solution, but that seems pretty unlikely.

The scary prospect for investors is that whoever ends up in charge of the Ukraine – and it’ll be either the EU or Russia – will be responsible for its finances, which are in a pretty diabolical state.

If the Kiev protestors get what they want and Europe does end up taking control of the country (with or without Crimea), a note by Citi analyst Matt King suggests one outcome would be for the International Monetary Fund to put money into the economy.

‘Probably this would come in the form of one small ($2bn?) tranche prior to the elections with the promise of a much larger sum afterwards.’

The concern for investors is whether a Ukrainian default would have eurozone meltdown-like repercussions for other countries. King thinks not – although some European banks have, to use City parlance, a worrying amount of skin in the game:

Source: Citi

In the long term, though, this – and troubles in other emerging markets – could have an impact on investors’ views of the relative safety of investing in emerging markets. Since the US government announced an end to quantitative easing, emerging markets have lost some of their shine.

No wonder the price of gold has risen by 1.34% this morning. There’s nowhere else to hide….

Find this article useful?

Get more great articles like this in your inbox every lunchtime