Can Financial Contagion in Putin’s Russia Spread West?
Policy + Politics

Can Financial Contagion in Putin’s Russia Spread West?

That one-two punch of falling oil prices and economic sanctions has been more than enough to put the Russian economy on the ropes. Now, experts say Western leaders really ought to think twice before delivering a knockout blow.

The Russian ruble may have found a bottom yesterday, as President Vladimir Putin’s government’s heroic measures to stop the currency’s slide appear to have worked for the time being, but the historic plunge in the currency’s value against major global benchmarks leaves the Russian economy a shell of its former self, which could be bad news for its trading partners and, by extension, the rest of the global economy.

Related: Putin Threatens to Move Nukes into Crimea as Ruble Plunges

The Russian central bank apparently committed a sizeable amount of its dwindling foreign currency reserves to buying rubles on Wednesday, in a further effort to restore some of its value. Russian bank regulators on Wednesday told bankers that they could temporarily stop making their securities portfolios to market, meaning that they do not have to recognize losses related to the plunging ruble. When they value the loans on their book, they will, for all intents and purposes, be allowed to pretend that the ruble is worth what it was worth in the third quarter of this year.

WHY THIS MATTERS

Financial crises are notoriously difficult to contain and can do massive economic damage. More importantly, they don’t respect borders. Some now worry that an out-of-control Russian economy could begin infecting its neighbors.

While the ruble surged from the record lows it plumbed Tuesday (at one point touching 80 rubles to one U.S. dollar) it remained between 60 and 65 Wednesday afternoon, still far weaker than it was just a few months ago. The steep plunge followed by a sharp but limited recovery has left merchants doing business in Russia struggling to set prices.

Apple shut down its website in Russia on Wednesday, apparently out of uncertainty about how to price iPhones and other luxury items. Some Russians have reportedly been purchasing Apple products and other luxury goods as a store of value, because it has become increasingly difficult to convert rubles into more stable foreign currencies.

President Barack Obama is now poised to sign legislation placing even more restrictions on major Russian industries, and to send some $350 million in arms and other aid to the Ukrainian government. The bill was passed with virtually no opposition by a U.S. Congress bent on punishing the Russian Federation for its invasion of Ukraine’s Crimean peninsula and its continued support of armed rebellion in Eastern Ukraine.

Related: Putin’s Ruble Troubles Start Crossing Borders

However, some are beginning to question whether further damaging Russia’s economy is in the long-term interests of the West.

In an op-ed published by Toronto’s Globe and Mail newspaper, McGill University Professor Juliet Johnson, who studies the financial system in post-Communist Russia and Eastern Europe, warned that the crisis in Russia could spread out of control.

“Why should the West lend a helping hand to Russia, just when its sanctions seem to be having devastating effects?” she wrote. “Because financial market panics in major world economies are not in anyone’s interest. Financial panics tend to spread.”

Indeed, there was evidence Wednesday that the ruble crisis is having impacts beyond Russia’s borders. The currencies of other emerging market countries, particularly those with close geographic or trade ties to Russia are also dropping in foreign exchange markets. Foreign exchange traders, according to Robert Mackenzie Smith, of trade publication FX Week, are beginning to compare what is happening in Russia to the events in Thailand that preceded the financial crisis that decimated Asian economies in 1997.

Related: Putin Urges Oligarchs, Criminals to Bring Dirty Money Back to Russia

Even before the ruble’s most recent drop, the Russian central bank had predicted that the country will fall into a significant economic recession next year. The Russian economy is utterly dependent on the sale of oil and natural gas for its survival, and crude oil prices have dropped even more dramatically than the value of the ruble.

Russia does not have a very large trading relationship with the United States, so the impact of its looming economic collapse may not resonate with most Americans. But it does have significant relationships with numerous European and Asia economies, all of which would be damaged by cratering demand from Russia. With Europe in particular still economically fragile following the Great Recession, it would be bad news for the U.S. if the E.U., which taken as a whole is the country’s largest trading partner, were to come down with some version of what is currently infecting the Russian economy.

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