December 18, 2014
In the morning of Dec. 16, the ruble was supposed to rally. Instead, it collapsed. The ruble fell as the current account was improving, something that shows the collapse has had little to do with speculators, but has had everything to do with capital outflows, a signal that domestic investors and depositors have lost credibility in the Russian policymakers. Uncertainty continued on Dec. 17.
With this, political risk in Russia is on the rise. However, the magnitude of this crisis of confidence remains unclear. While Putin’s approval ratings are high, the ruble’s weakening is an indicator of the Russian economy’s dependence on oil prices, as well sanctions and a declining sentiment from the West.
This will likely reflect in statements coming from Russia: there is probably going to be increased assertiveness towards the West, considering that Moscow needs to support the idea, in front of its domestic public, that the economic problems are due to external factors. It remains to be seen what the public reaction will be, considering that this recent crisis comes after a miscalculation on Ukraine and on the background of an oil crisis.
However, depending on how the crisis develops, the West doesn’t want to push Russia over the edge. The interconnections between the Western economies and Russia, considering the contagion risk, are a factor that the West must take into account. There are a lot of questions still to be answered, beginning with the one referring to how severe is the ruble fallout on Dec. 16 and what’s the impact on the financial and economic system of Russia, of Europe and, later on, consider the global implications.