While markets were seemingly transfixed by Facebook CEO Mark Zuckerberg's congressional testimony this week, there was a significant market shock far away in Russia.
On Tuesday, Russia's stock index fell more than 8 percent — its biggest drop since the imposition of international sanctions in 2014 after Russia invaded Crimea. The Russian ruble also imploded — falling by more than 10 percent during this week.
What is really interesting about this is that one of the primary drivers of the ruble's valuation is the price of oil, and that is moving in its favor. Typically those two assets move in tandem as Russia's economy is so heavily dependent on oil exports. But with the price of oil at its highest level since 2014, the markets are experiencing an unusual period of divergence. This graph shows clearly how those two assets moved in lock step until very recently.
So what's going wrong in Russia?
Late last week the U.S. imposed sanctions against seven Russian oligarchs and 14 companies that have close ties to the Kremlin.
One of those companies is an aluminum manufacturer — Rusal — listed on the Hong Kong stock exchange that produces almost 6 percent of the world's aluminum. Of course that company is likely to be hurt by the recent 10 percent tariffs imposed by the U.S. on aluminum.
The catalyst for some of this conflict was the diplomatic feud that erupted between the U.K. and Russia after the poisoning of Sergei Skripal and his daughter in March. The situation snowballed as other countries joined in.
The latest issue, of course, is the tension surrounding Syria and its connection with Russia.
Where do we go from here? There is a decent amount of chatter in the markets about whether or not the Russian government and its central bank would step in if market volatility and the ruble's decline get out of control. The consensus seems to be that we are not at that stage just yet.
My View: There is a broader picture here that is worth discussing. I would argue that Russia is in a rougher long-term bind in this situation than it has faced in the recent past. As with China, the U.S. has designated Russia as a strategic competitor in terms of our national security strategy. So clearly, there will be no help coming from Washington to Moscow anytime soon. In addition, the trade conflicts that are currently emerging as the U.S. seeks a new paradigm for global trade structures will affect Russia as well. We will be keeping a close eye on how that country responds in the coming weeks.
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