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All you wanted to know about: The Russian crisis

K VENKATASUBRAMANIAN | Updated on December 23, 2014

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There never is a time when some part of the world isn’t in financial crisis. The latest to get into trouble is Russia as it grapples with falling oil prices, the rapidly declining rouble and an economy teetering on the verge of recession. Russia is in a crisis. So, what is the crisis all about and should you be worried about these developments? While you should understand it, you definitely should not be losing sleep over it.

What is it?

Russia is one of the world’s largest oil producers and exporters. Oil forms 39 per cent of the federation’s exports. With global oil prices nearly halving from $110 a barrel to $55-60 levels over the past five months, the worry is how Russia’s trade balance, GDP and finances will be hurt. Let’s not forget that western countries have also imposed sanctions on Russia for its intervention in Ukraine. This has restricted Russia’s access to external capital.

As a result, from expectations of an economic growth of 3.2 per cent at the start of this year, the federation now faces a possible contraction. With these worries sparking global fund pullouts from Russia, the rouble is down more than 40 per cent against the dollar in 2014.

While trouble was brewing for a while, all hell finally broke loose a week ago, when the Russian central bank increased interest rates by 7.50 percentage points in an attempt to defend the rouble. Higher interest rates and a slowing economy have triggered fears of loan defaults. There are also concerns of a banking crisis.

Why is it important?

The slowing of a large economy such as Russia has negative implications for its trade partners and global growth. Already, Apple has indicated that it would stop online sales in Russia till its currency stabilises. Automotive major Nissan’s CEO has been on record saying that the Russian crisis would mean a ‘bloodbath’ for automakers. It has even stopped taking orders on specific models. Gold bugs are worried that Russia will sell a part of massive gold holdings to shore up its finances.

Russia is said to hold more than $400 billion in foreign reserves. It has sold these dollars in order to prop up the rouble. As of now, analysts do not expect any defaults in Russia’s debt repayment or a precarious situation on its forex reserves. But if the problems drag on, then the implications could be serious for the world. More than the sanctions, a revival in oil prices is critical to Russia’s revival.

Why should I care?

Indian companies with a direct exposure to Russia have suffered big jolts to their stock prices last week. Dr Reddy’s Labs saw a steep correction as Russia is a key market for it. India also exports tea, coffee, spices, apparel and clothing, engineering goods and drugs to Russia and this could aggravate the export slowdown.

If you are a stock market investor, last week was a reminder that the Indian market remains vulnerable to global events, given its reliance on foreign investment flows. Russia’s troubles could impact domestic interest rates too, if the RBI decides to hold on to its rates for a while now.

As global investors tend to clump all emerging markets together as one asset class, Russia’s troubles could also revive concerns about India’s trade balance and the rupee. Therefore, if you’ve enjoyed many months of calm on stocks, bonds and rupee, brace for turbulence ahead.

The bottomline

Thought India was in a Goldilocks situation with falling oil prices and inflation? Well, the bears have just arrived.

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Published on December 22, 2014

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