Russian markets nosedive as Ukraine panic takes hold

Russian markets nosedive as Ukraine panic takes hold

Investors in Russia reacted with panic Monday to the potentially disastrous economic consequences of Russian military intervention in Ukraine, with Moscow stock markets crashing up to 12 percent and the ruble plunging to historic lows against the dollar and euro.

Members of a pro-Vladimir Putin group at a rally in Moscow on August 17, 2011 carry an imitation banknote with a picture of Putin

In an emergency move to limit the losses for the ruble amid what risks becoming at least Russia's worst economic crisis since 2009, Russia's central bank hiked its main interest rate by 150 basis points.

President Vladimir Putin on Saturday won approval from Russia's upper house of parliament to send troops into Ukraine due to the stand-off in Crimea following the ousting of pro-Moscow president Viktor Yanukovych.

But economists warned the move risks creating a litany of further troubles for the Russian economy, which is already battling chronically slow growth.

In comments that further rattled investors' nerves, US Secretary of State John Kerry warned Putin that Moscow could lose the right to host the G8 this year in Sochi and could even be expelled from the group of top nations itself.

Military intervention would drain further resources from a Russian budget already stretched by costs like the Sochi Olympics, limit Russia's economic ties with the West and force Russian companies into huge write-offs in Ukraine.

"Sochi was already expensive. Military adventures and strained relations with the West can be much more expensive than that," said economist Holger Schmieding at Berenberg Bank in London.

"Russia cannot afford that in the long run," he added.

Kerry himself gave a bleak assessment of the consequences for Russia, saying Putin may be hit by "asset freezes on Russian business, American business may pull back, there may be a further tumble of the ruble."

- Black Monday -

The MICEX stock market in Moscow closed down 10.79 percent while the RTS bourse fell 12.01 percent. It was also a Black Monday of carnage on the stock markets for some Russian blue chip shares.

Stocks in Russian gas giant Gazprom -- which has a huge contract to export gas to Ukraine as well as banking interests in the country -- fell 13.89 percent. Russia's biggest lender Sberbank was down 14.91 percent.

The ruble has already been under major pressure in recent weeks due to investor nerves about emerging markets and Russia's flimsy medium-term growth prospects.

But the Ukraine crisis Monday pushed it to levels not seen even in Russia's 2009 financial crisis that followed the collapse of Lehman Brothers and a brief war with Georgia.

The ruble slid to 50.22 rubles to the euro, from 49.58 on Friday. It fell to 36.44 rubles to the dollar from 36.28 on Friday.

The Bank Rossii (Bank of Russia) raised its main interest rate to 7.0 percent from 5.50 percent in a clear bid to support the ruble and stem an already alarming capital flight amid the tensions between Russia and Ukraine.

"The decision is aimed at averting the appearance of risks for inflation and financial stability linked to the increased volatility on financial markets," it said in a statement, adding the hike would take effect from 0700 GMT Monday.

Deputy Economy Minister Andrei Klepach admitted the decision was linked to the "hysterical situation" surrounding the pressure on the ruble.

- 'Worse than after 2008 war' -

The economic consequences of intervention in Ukraine risk becoming a huge headache for Putin and have parallels with the 2008 war with Georgia over the region of South Ossetia, which fed into Russia's 2009 financial crisis.

However the magnitude of the Ukraine situation means a Russian economic crisis in 2014 could be even more serious.

"Unlike the five-day war in South Ossetia, we are concerned that the tensions in Ukraine will very likely last considerably longer, having a prolonged negative effect on Russia's economic environment," economist Natalya Orlova at Alfa Bank said in a note to clients.

She said that not even the current depreciation of the ruble would support Russian GDP while several Russian banks were hugely exposed to Ukraine.

Before 2009, Russia had enjoyed stellar average annual growth rates of seven percent under Putin's rule. But after expanding just 1.3 percent in 2013, economists now warn it risks being trapped in a cycle of low growth.

Russia's top business daily Vedomosti said the country now faced economic stagnation and businesses were already preparing for the worst.

"What is there to say?" it quoted an Russian economy official as saying. "It is clear this is only going to make the already complicated economic situation worse."

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