Rouble Crisis: What will be the Fallout?

Russian President Vladimir Putin said it will take the Russian economy two years to rebound, which many observers would say is an optimistic outlook. For an economy that is heavily dependent on oil, the fall in global prices of this commodity has hit Russia hard, and caused the rouble’s value to freefall, compounded by the economic sanctions imposed by the west.

Russia, somewhat naively, believed that the price of oil would always remain high, and the country would be free to purchase imports and fund government expenditures using the US dollars it receive from oil sales abroad.

The sharp collapse in the global oil price has taken Russian officials by surprise and over the past couple weeks in particular, they have attempted increasingly desperate measures to reign in their country’s mounting economic problems, which have all failed quite spectacularly, now leaving Russia on the brink of a long and arduous recession, with investors clamouring to rid themselves of any rouble assets.

Repercussions for Europe

First came Russia’s retaliatory ban on European Union (EU) imports of meat, fish, dairy, fruit and vegetables, which has impacted European suppliers for a few months now.

The EU is Russia’s biggest trading partner. Russia is a huge importer of European products, and so the fall in rouble and the impending Russian recession will hit European exporters to Russia and Russian tourist spots in Europe.

Regarding tourism, the EU will see a direct and drastic reduction of Russian tourism. In 2012, Russians spent €5 billion traveling to Western and Central Europe. Countries such as Spain, Greece and France will certainly feel the effect. Russians are notoriously big spenders abroad with 54% of Russian holidaymakers to France staying at 4 or 5 star hotels.

Property purchases and other types of investment will also take a hit.

There is also the possibility of a backlash in Russia against European products. Russians are increasingly blaming the west for their problems, with their president, Vladimir Putin believing it to be a calculated strategy led by the United States to bring the Russian economy to heel. This belief is growing in Russia, and a stoic nationalist streak is a very real danger to European exports to Russia.

With US President Barack Obama signing a bill for new sanctions against Russia, it may well increase, and the Putin government may react by banning more exports from other sectors in the United States and the EU.

What effect will the rouble and Russian economic crises have on European companies?

Should there be any contagion into European countries, particularly large trading partners such as Ukraine, it would present a whole new danger for the EU and indeed the global economy. The danger of a domino effect would potentially come to the fore. With Europe already teetering on an economic tightrope, contagion is the last thing the continent needs.

For now, European companies with exposure to the Russian market will inevitably be affected by rising prices and weakening currency flows with the rouble.

Repercussions for the rest of the world

US Federal Reserve Chair Janet Yellen said recently that even a prolonged, deep Russian recession would not affect the US economy to any significant extent. Trade with Russia accounts for a mere 1% of total US trade and with job creation chugging along nicely and projected growth for the housing market, according to Yellen, Russia’s woes will not spill over to the US economy.

Yellen may be right, but there is more to it than that. Should Russia be unable to pay its debts to European banks, the banks would surely have to write them off. Companies in Europe and the United States would probably have to take a haircut on investments in the country or write them off completely. Europe would be more vulnerable than the United States, but any significant adverse effect on the European economy could spell trouble across the pond.

Another probable repercussion is the standoff over Ukraine. If, as expected, Russia and the west do not reach an agreement over Ukraine, tensions will continue. What this means for the world is that more sanctions are likely between Russia and the west, and the European economy in particular will be vulnerable to such a delicate situation. Global financial markets would also inevitably be affected.

A long, painful Russian recession will only prolong any current adverse impact and a recession spillover into other countries would likely affect more EU companies, including those who do not have direct exposure to the Russian market.

Whatever happens, the EU will bear the brunt of an economically weaker Russia to one extent or another, though in the long-term, oil prices will rise once again, and once they do, so will Russia.

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