Intervening in Ukraine is already causing Russia to have tumbling stock markets and a big currency devaluation. This is a big blow to the county’s already faltering economy according to this article.
The central bank of Russia was forced to increase interest rates from 5.5% to 7% on Monday in an attempt to stabilize markets and counter the impact of nearly a 10%decline in the value of the ruble this year. Russia has a leading role as a world energy supplier but it still needs to buy food, clothing, medicines, machinery, and transportation equipment from other countries. A weaker currency will make these imports more expensive.
So far this week, the ruble has stabilized. It still is one of the world’s weakest currencies this year though. In addition to the devaluation of Russia’s currency, the country is experiencing a decrease in its leading companies shares. Shares have fallen 7% since the start of this week and now are down 11% in 2014. Government officials from other countries, such as the US, believe Russia’s “fragile economy” is getting worse due to the country’s involvement on the international stage.
Last year Russia’s GDP grew by about 1.3% in comparison to 3.4% in 2012.
This is one of the sharpest slowdowns in emerging markets. Forecasters were expecting Russia to see a slight upturn in 2014 but the standoff in Ukraine might lessen this outcome. Rating agency Fitch said “rising inflation, higher interest rates, and a draining away of foreign capital” were increasing the risk of a slowdown.
“Capital flight could accelerate, particularly if the threat of economic and financial sanctions increased. While not our base case, were such sanctions to materialize, the potential impact on growth and investment could lead us to review our sovereign rating on Russia,” Fitch added.
The impact of the Ukrainian crisis on the Eurozone so far has been muted but there is potential to cause serious damage. European Central Bank President Mario Draghi says, “the geopolitical risks in the area could quickly become substantial and generate developments that are unforeseeable and potentially of great consequence.”