As Investors Brace for Ruble's Fallout, Focus is In Putin's Next Move

By Alan Cullison 

        MOSCOW--Russia's currency has collapsed for the third time in less than two decades. The question now is whether its latest market meltdown will spark a global contagion, or a mayhem that Russia confines to its borders.
        Russian crises have spread turmoil before. After a blowout of the ruble in 1998, the government not only defaulted on its bonds, but announced that Russian companies wouldn't be paying their debts either. Western banks were left in the lurch, and for years Russia was a pariah of credit markets.
        Russia was gentler to its creditors in the world financial crisis of 2008. By then it had amassed huge foreign-currency reserves. It blew through one-third of them to support the ruble so Russian companies could make good on debts. Russia underwent a deep recession the following year, but its creditworthiness remained mostly unscathed.
        "There has already been some contagion" to the current turmoil in Russia in the form of heightened fear among emerging-market investors, said Peter Halloran, chief executive of the New York City-based Pharos Financial Group.
        But how far the tumult goes is a deeper and more complex problem than simple balance sheets. Russia again has huge currency reserves--now the world's second largest at more than $400 billion--enough to stop the slide in the ruble and shore up markets for the near future. But whether President Vladimir Putin, who is fighting off Western sanctions, wants to use the reserves to soothe Western creditors, is an open question.
        Mr. Putin has suggested that the double whammy hitting Russian markets--collapsing oil prices along with Western sanctions in response to Russia's intervention in Ukraine--are a concerted Western machination to weaken Russia. In response to the sanctions, he has instructed officials to prepare for an isolation from the West, a move that could influence his decision-making about repaying Western creditors and containing Russia's financial pain.
        "Everyone is arguing until they're blue in the face about whether Russia's central bank has been handling the ruble correctly, but I don't think that is the issue," said Christopher Granville, managing director of Trusted Sources, a London-based emerging-market research firm. "Sanctions are the fundamental driver here. They are a garrote around the neck of the Russian economy."
        As in Russia's first big financial blowout in 1998, the collapse of the ruble this year has been sparked by cratering oil prices. But there just about all the similarities end. In 1998, government tax collection was in shambles, and the budget was dependent on the International Monetary Fund and bonds, most of them short-term.
        Today Russia is running a budget surplus and has little debt. After the fall of the ruble this week, the central bank had enough foreign-currency reserves to buy up all the ruble deposits in the country and still have about $100 million left over, said Charles Robertson, chief economist of Renaissance Capital in London.
        Lately the fall in the Russian currency has outpaced the fall in oil, indicating that investors are worried about more than Russia's fiscal balances.
        Investors in Russia say the quickened pace of the ruble decline is due to worries about Mr. Putin himself, and a political course that appears increasingly erratic. While the annexation of Crimea and support of pro-Russian rebels in eastern Ukraine has been popular, Russia's elite has been worried by the rift with the West, as well as the arrest in September of a prominent Russian oligarch on alleged money-laundering charges. Bankers note that Russia's high-net-worth depositors have been more likely to cash out of rubles and flee to dollars.
        In the face of the selling, the foreign-exchange reserves may not be as large as commonly perceived, said Mr. Halloran, of the Pharos Financial Group. The West's economic sanctions against Russia mean that foreign-exchange reserves must be used for a lot of things they ordinarily wouldn't be tapped for. Russian corporate borrowing has mushroomed in recent years, and Russian companies now have about $200 billon in external debt outstanding in Eurobonds.
        Sanctions effectively cut off some of these companies from financial markets, "so now a lot of these things have got to be financed internally," Mr. Halloran said. "The reserves have got to be viewed now differently for Russia than they were in the past."
        Mr. Halloran says he worries that Mr. Putin, facing scarce resources, could turn inwardly and plunge Russia into deeper isolation. "It wouldn't be unprecedented, when a country turns authoritarian, to refuse to pay debts in a tit-for-tat with the outside world," said Mr. Halloran, citing Argentina as an example. "The idea behind sanctions is that people will rise up against their leaders. But in fact it often has the opposite effect, and the relationship becomes unstable. People make bad decisions."
        Mr. Halloran says clues to Mr. Putin's way forward should be coming soon, as he decides whether to reshuffle his government, or keep the current clique of security service colleagues that has surrounded him for years.
        Another factor to watch are negotiations to establish a peace agreement in Ukraine. Any sign that Mr. Putin is softening his stance on Ukraine is a sign that he is hoping, sooner or later, to rekindle economic ties with the West.
        (END) Dow Jones Newswires

        December 17, 2014 17:23 ET (22:23 GMT)

#AlanCullison
#Putin
#Ruble
#Moscow
#Russia