Holy smokes. The Russian ruble has just suffered ‘the worst slump in the world,‘ according to a Bloomberg report.
Why is the currency being pounded so heavily? Global investors started dumping Russian assets – stocks and bonds – after President Vladimir Putin sent military forces to take over parts of Ukraine, which has been plagued by civil unrest in recent months.
Investors were spooked by fears of retaliation by Western nations (mostly in the form of sanctions) for Russia’s actions in Crimea, Ukraine.
The ruble, not surprisingly, slid quite alarmingly: it suffered its biggest decline in 29 months on Monday, sinking to 36.6 against the US dollar and to 50.30 against the euro.
In a bid to prevent the currency from collapsing, Russia’s central bank governor, Elvira Nabuillina, hiked the policy rate to 7% from 5.5% on Monday.
The central bank, Bank Rossii, also had to sell an estimated $10-$12 billion to defend the currency’s value, media reports said.
However, Russia’s economy may still end up paying the price for its military actions.
For one thing, a weaker rouble could force the central bank to further hike interest rates that could choke economic growth.
Russia’s economy had been expected to expand by 3.1% this year, after posting a dismal growth of 1.3% in 2013. However, higher interest rates could slow that growth — or even tip the economy into recession.
The ongoing stand-off between Russia and the West could also intensify capital flight from Russia, which adds to the turmoil in emerging markets triggered by the US Federal Reserve’s taper plan that began earlier this year.
Latest reports suggest that Russian President Putin has ordered troops taking part in military exercises in western Russia near the border with Ukraine to return to their bases, according to a USA Today report. However, no explicit mention was made of the estimated 16,000 Russian troops believed to be already in Crimea.
To be sure, this saga is by no means over.