Bob Johnson, Morningstar’s director of economic analysis takes a look at Russia and the impact the crisis could have on the rest of the world.
What’s driving the rouble to such lows?
Dramatically falling oil prices-- we're at about half of where we were on world markets in terms of the price for a barrel of oil. So it's a pretty dramatic impact, and the Russian economy is one that's very dependent on natural resources to drive the economy.
With oil being down, people are afraid they may not be able to repay their debts. People are selling their rubles to get back into other currencies, and so that kind of feeds on itself. People say, "Oh, it's down more--I'm scared." Oil prices keep falling and people wonder where the bottom is. And so, all of that's driving the ruble lower. Until oil stabilises a little bit, people are very concerned.
The Russian Central Bank attempted to stem this decline by raising interest rates dramatically from 10% to 17%....
It's a pretty standard prescription to raise interest rates when there is a run on your currency. The thought pattern is that if you raise the rates, people will come in and buy your debt and say, "Well, there is a certain percentage of a chance it defaults, but I get this higher rate--I'm kind of being paid a little bit for it." So, the hope is that people flood in. They have to exchange, they have to buy rubles to put it in the Russian debt and that would help the currency rise. It's a fairly standard procedure to try to do that. The bad part of it is that it ruins the local economy badly, but I think they've said that their people can live with that. They're willing to take the chance. There was kind of a shock-and-awe strategy, hoping that it would stop the currency decline.
However, in the short run, it wasn't very effective. I think people were saying, "Well, we can't put probabilities on this. We can't start buying this yet." If oil is $50, that's one thing; if it's $40, that's another thing; if it's $30, that's another. So, we've got these oil prices going down dramatically with no signs of stabilisation. People are asking, "Is 17% the right rate? Maybe it needs to be 20% if there is a 20% chance they are going to default." So clearly, that's a very big issue. And until oil stabilises, I think a lot of people are unwilling to take the bet.
Is this '98 over again, where problems in Russia are then going to spread to other emerging markets?
We had a very unusual set of events in 1998. I don't want to rule it out and say it's impossible. But certainly this time around, many emerging-market economies are much better positioned. They saw what happened and learned their lessons from 1998. Countries like Mexico and some of the other countries that had issues at that time really have built up reserves so that they're not dependent on the day-to-day markets, where somebody pulls a few dollars out and they've got no backstop--they've got no reserves. This time, everybody's got reserves. So, they're feeling a lot safer, and I think people are hoping that the problems are a little bit more isolated this time and that it's one thing, oil, that's driving things, which actually helps some emerging-market economies.
Would the U.S. feel a major economic impact from what's happening in Russia?
No. I think, overall, the U.S. is kind of in one of those situations where a lot of economies really hurt because of the low commodity prices, but we--as being a consumer nation, there's no country with a higher consumption number--we tend to benefit from the low commodity prices probably more than anybody. And again, in 1998 when everybody else was having problems, the U.S. economy--of course, there was the Internet boom, so it's hard to sort things out--but the U.S. economy was doing pretty well. So, I think that the lower commodity prices tend to outweigh things.
In the case of Europe, it might not quite be as benign. They'll benefit from the lower inflation absolutely, but they are going to have some other issues--namely, whatever they're exporting to Russia. Because obviously, with the kinds of rates in Russia, that's going to mean less demand for imports from the rest of Europe. So, it may have a little bit greater of an impact there than here.
What signs should you be watching for that maybe it's getting out of control, that there is some contagion?
I think you'd start to see rates in other countries go up, and certainly if you hear people talking about their reserves going down or whatever, those are all things to keep in mind. But especially as the U.S. economy does well, which is a halfway decent engine for worldwide growth, I think we may come through it pretty well.
This interview of Bob Johnson by Jeremy Glaser initially appeared on Morningstar.com.
