How the Markets Are Already Punishing Russia

A wide range of Russian assets — stocks, bonds, and the ruble — plunged in value today.

Ukrainian soldiers (behind) stand inside the gate of a Ukrainian military base as unidentified heavily-armed soldiers stand outside in Crimea on March 3, 2014 in Perevalne, Ukraine.
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Jason Karaian, Quartz
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Jason Karaian, Quartz
March 3, 2014, 4:15 a.m.

Strongly worded state­ments, threats of travel re­stric­tions, and sum­mit no-shows. So far, these are the re­l­at­ively mild dip­lo­mat­ic im­plic­a­tions for Rus­sia of its in­cur­sion in­to Ukraine, as few in the West can stom­ach an open mil­it­ary con­front­a­tion with Mo­scow over its ap­par­ent oc­cu­pa­tion of Crimea.

But the mar­kets are pun­ish­ing Rus­sia much more swiftly than the dip­lo­mats. A wide range of Rus­si­an as­sets — stocks, bonds, and the ruble — plunged in value today. To shore up the ruble, which is plumb­ing re­cord depths, Rus­sia’s cent­ral bank un­ex­pec­tedly hiked in­terest rates today. It rat­cheted up the bench­mark one-week rate from 5.5% to 7%, and traders re­port that the cent­ral bank has also been spend­ing bil­lions of dol­lars in cur­rency mar­kets to stem the fall in the value of the ruble.

The two main Mo­scow stock mar­kets, the Micex and the RTS, have fallen by more than 10% at the time of writ­ing, in a broad-based sel­loff. Big Rus­si­an com­pan­ies like Gazprom and Sberb­ank saw their share prices plunge as traders dumped their shares.

For its part, Gazprom said today that it would re­con­sider the gas price dis­count it ex­ten­ded to Ukraine only a few months ago. Of course, Rus­sia has not hes­it­ated to pun­ish Ukraine by re­strict­ing its en­ergy sup­ply in the past, with re­ver­ber­a­tions felt throughout West­ern Europe. These trade links — West­ern Europe gets about a quarter of its nat­ur­al gas from Gazprommake strict eco­nom­ic sanc­tions against Rus­sia, like the ones im­posed by the West on Ir­an or Syr­ia, im­prac­tic­al. After all, the in­ter­na­tion­al op­pro­bri­um that met Rus­sia’s in­va­sion of Geor­gia in 2008 was nev­er backed with ser­i­ous ac­tion.

As we have writ­ten be­fore, Putin takes great pleas­ure in ”de­liv­er­ing a bloody nose” to his per­ceived en­emies, even when it risks harm­ing his stand­ing on the in­ter­na­tion­al stage. In­deed, after speak­ing with Putin yes­ter­day, Ger­man chan­cel­lor An­gela Merkel re­portedly told US pres­id­ent Barack Obama that the Rus­si­an lead­er seemed out of touch with real­ity — “in an­oth­er world.”

Eco­nom­ic­ally speak­ing, the real­ity for Rus­sia is not nearly as ro­bust as the im­age pro­jec­ted by its of­fi­cials’ bel­li­ger­ent rhet­or­ic or its fast-mov­ing mil­it­ary. Its growth has lagged emer­ging-mar­ket rivals like China and In­dia for some time.

What’s more, Rus­sia only re­cently van­quished double-di­git in­fla­tion. An ex­ten­ded fall in the value of the ruble could push in­fla­tion back up, fur­ther dent­ing the coun­try’s eco­nom­ic pro­spects.

And so, per­haps for the first time since un­rest broke out in Ukraine, Putin may be find­ing that his ac­tions have costs — not the costs that world lead­ers threaten to im­pose in vague com­mu­niqués, but the pain that res­ults from thou­sands of name­less, face­less trans­ac­tions in stock, bond, and cur­rency mar­kets as in­vestors flee the un­cer­tainty and in­stabil­ity sown by Mo­scow’s un­pre­dict­able in­ten­tions in Ukraine. These are at­tacks that can­not be re­pelled by troops and tanks, but the dam­age they cause is every bit as real.

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