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Dateline Russia: Stocks Down 11% Ruble Falls to All Time Low

March 4, 2014 By Richard C. Young

Here The Wall Street Journal stipulates that Russia’s soft underbelly is its economic reliance on Europe. But this late in the winter its favored “natural gas diplomacy” won’t have much effect because Ukraine and the other European nations already have enough supplies to get to Spring.

Russia’s Micex stock index fell 11% on Monday and the ruble hit an all-time low after Vladimir Putin’s weekend invasion of Ukraine’s Crimea peninsula. The sour reaction suggests that investors understand that Mr. Putin’s Achilles’ heel is the Russian economy and its access to world financial markets, if the West has the wit and will to exploit it.

The conventional wisdom in the pundit class is that Russia holds the economic edge because of its natural gas supplies to Ukraine and much of Europe. But that supply is a double-edged sword because Russia needs the foreign-exchange earnings as much as Europe needs the gas. With enough stockpiles to get through the rest of the winter, Ukraine and Europe are also less subject to immediate energy blackmail.

More broadly, the Russian economy is no global tiger. Last year it grew 1.3% and the ruble has been among the currencies hit hardest by the flight away from emerging markets as the U.S. Federal Reserve tapers its bond purchases. Russia’s central bank raised its benchmark interest rate to 7% from 5.5% on Monday to stop further flight.

Russia’s economy continues to be largely an oil commodity play that has diversified little thanks to Mr. Putin’s treatment of foreign and domestic investors. As in most authoritarian regimes, Russia’s economy is top-heavy and built on favors for oligarchs who do what the Kremlin wants. Do otherwise and you end up in Siberia like Mikhail Khodorkovsky, or dead like anti-corruption lawyer Sergei Magnitsky.

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Richard C. Young
Richard C. Young is the editor of Young's World Money Forecast, and a contributing editor to both Richardcyoung.com and Youngresearch.com.
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