MOSCOW: Russia’s suddenly escalating financial crisis risks spilling beyond its borders and endangering parts of the global economy.
With economies in Europe, Japan, China and Latin America already ailing, fresh threats have emerged from Russia’s shrivelled currency, its move to dramatically boost interest rates, damage from plummeting oil prices and Western sanctions over Russia’s action in Ukraine.
The alarming 10 per cent drop in the ruble over the past two days has amplified the economic turmoil in Russia. Investors fear that Russia may default on its foreign debt obligations – a move that would inflict hundreds of billions in losses on lenders abroad.
Russia has lost control of its economy and may be forced to impose Soviet-style exchange controls after “shock and awe” action by the central bank failed to stem the collapse of the rouble.
“The situation is critical,” said the central bank’s vice-chairman, Sergei Shvetsov. “What is happening is a nightmare that we could not even have imagined a year ago.”
The currency crashed to 100 against the euro in the biggest one-day drop since the default crisis in 1998 as capital flight gathered pace, despite a drastic rise in interest rates to 17pc intended to crush speculators and show resolve.
Yields on two-year Russian bonds spiralled to 15.36 percent, while credit default swaps are pricing in a one-third chance of a sovereign default. The shares of Russia’s biggest lender, Sberbank, fell 18pc.
In Washington, the White House said it had no intention of easing pressure on Russia to halt the freefall. “It is president Vladimir Putin’s decision to make. The aim is to sharpen the choice that he faces,” it said.
The financial consequences for the United States could be modest because of Russia’s diminished economic stature. Yet the geopolitical risk could ripple across continents.
Russia began the year as the world’s eighth-largest economy with a gross domestic product of $2.1 trillion, according to the World Bank. A single ruble is now worth less than two pennies, having lost about 50 per cent of its value against the dollar since January.
This means Russia’s GDP has been halved in dollar terms, putting it roughly on par with Mexico and Indonesia as the world’s 15th largest economy.
President Barack Obama will not veto a law passed by Congress imposing a raft of new sanctions against Russia, even though he warned previously that it goes too far for European leaders and risks splitting the trans-Atlantic front. The measures include $350bn of military assistance to Ukraine, and authorize Mr Obama to impose curbs on energy companies investing in Russia, as well as to prohibit credit to Gazprom.
