Vladimir Putin put the Russian invasion of Ukraine on “pause” at a press conference on Tuesday, and markets stepped back from the ledge. The rout in Russian assets was partly reversed; the ruble regained some ground, as did stocks and bonds. As long as there isn’t any shooting—aside from the odd warning shot—the mood seems to be one of cautious relief.
But don’t expect any meaningful money to pour back into Russia until the ultimate outcome of Ukraine’s crisis becomes clearer. Was Putin’s conciliatory tone a result of the market’s rebuke? Perhaps, but that is probably a simplistic reading of the intrigue over the past few days, as purportedly stateless soldiers flooded into Crimea and issued mysterious ultimatums to local military units. Equally, Putin could be testing the markets and gauging whether it is worth his while to fight in the open instead of in the shadows.
On this point, it is useful to assess Russia’s economic options in case its military ones are activated in Ukraine. The mere threat of Western sanctions could be enough to defuse the situation, with the turmoil at the start of the week a preview of the pain that the markets can inflict. At the same time, Russia may calculate that it can withstand the turbulence longer than the West—more specifically that its energy users, banks, and others entities reliant on Russia’s physical and financial resources can hold their nerve.
As it happens, the last time Russia invaded one of its neighbors, it faced a severe financial crisis. But the Russian tanks rolling into Georgia was only one of the factors that battered markets in 2008, as the global financial crisis also hit the country hard. Is it better prepared this time around? Judge for yourself, as the charts below compare the Russian economy around the time of the invasion of Georgia with the situation today, starting from when protests kicked off in Kiev in November.
Foreign currency reserves
As the ruble tanked on Monday, Russia’s central bank hiked interest rates and spent more than $11 billion propping up the currency in the open market. It has quadrupled the amount it is authorized to spend to keep the ruble trading within its target range. If the currency comes under renewed pressure, future interventions will drain Russia’s foreign exchange reserves (which include some of the assets held in its two sovereign wealth funds, the Reserve Fund and theNational Wealth Fund). Compared with 2008, Russia is starting from a somewhat smaller base of reserves to draw on, meaning it has less firepower with which to defend the ruble. In the tumultuous 12 months from June 2008, Russia’s reserves fell by $165 billion, which would be worth nearly 40% of today’s reserves.
Even before the latest bout of ruble turmoil, the Russian currency had been drifting downward for months, losing 10% of its value against the dollar since November. Thus far, it is following a similar path to mid-2008, although to see a depreciation on the same scale it would need to shed another 20% of its value in the coming months, which will depend on how aggressively the central bank deploys its reserves in defense the currency.