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Is economy Russia's Achilles' heel?

Monday, March 03, 2014 - 02:06

March 3 - Russian assets tumble and the central bank hikes interest rates as markets take fright at the escalating tensions with neighbouring Ukraine. David Pollard looks at the impact the Ukraine crisis could have on Russia longer term.

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It could be from a Cold War text book. Russia threatens a neighbour, the neighbour - Ukraine - calls up its army reserves, the US threatens trade and diplomatic sanctions. But also under threat: Russian assets. A sell off drove the rouble to a record low against the dollar; Russian stocks nose-dived ten per cent as they opened for the week. Nikita Bekasov of the Moscow Stock Exchange. SOUNDBITE (Russian) MOSCOW STOCK EXCHANGE SPOKESMAN, NIKITA BEKASOV, SAYING: "The whole market just gave way, it rapidly went down." Gold was up to a four-month high - bunds, the Swiss franc and other havens all getting strong bids as investors looked for safety. Although military escalation of the conflict is a fear, some see the market moves as precautionary for now. Patrick Armstrong of Armstrong Investments. SOUNDBITE (ENGLISH) PATRICK ARMSTRONG, MANAGING PARTNER, ARMSTRONG INVESTMENTS, SAYING: ''The prospect of sanctions, the G8 meeting coming up, where Russia's supposed to be hosting it, the potential for other countries to boycott that and not turn up there, I think those are the issues for markets.'' If, indeed, sanctions are imposed. If they remain rhetoric only, the sell off in Russian assets could be the greater worry for the Kremlin. Jeremy Stretch of CIBC. SOUNDBITE (English) CIBC HEAD OF FX STRATEGY, JEREMY STRETCH, SAYING: ''There's talk that perhaps foreign ownership of the equity market could be as high as almost three quarters. So clearly, if you're a rational investor, you'll want to unwind or at least reduce your exposure there. So I think it's going to be a very tough battle for the Russian authorities to try and stem the slide of the rouble in the current environment ." A dependence on Europe for financial services - and as a market for gas exports - could also be the Kremlin's weak spot. If the EU were to withdraw the first - and wean itself off the second - Russia's slowing economy would take a severe blow. That of course, pre-supposes EU member states being able to agree. Pierre Briançon of Reuters Breakingviews. SOUNDBITE (ENGLISH) PIERRE BRIANÇON, EUROPEAN EDITOR, REUTERS BREAKINGVIEWS, SAYING: ''Europeans are divided. Some are more ready to appease Russia, like Germany. Some are more out of the game, like France, and some are more strongly anti-Russian like former eastern European countries.'' And so far in this unfolding crisis, Russia's President Putin has been more interested in action than words. If his next action is to move troops beyond Crimea into other areas of Ukraine, the crisis will take on an entirely new dimension.

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Is economy Russia's Achilles' heel?

Monday, March 03, 2014 - 02:06