MacroscopeRussia's currency crisis poses risks to other emerging markets
The rouble's volatility has turned deteriorating sentiment into a sharper, broad-based sell-off that is even affecting oil importing countries
In August 1998, Russia announced it would devalue the rouble and default on its domestic debt. The crisis sent shockwaves through the global financial system and led to the collapse of Long-Term Capital Management, a US hedge fund.
The fact that parallels are now being drawn between the currency crisis that Russia is suffering and the country's 1998 default speaks volumes about the severity of the turmoil that has engulfed Russia's financial markets and led to sharp declines in other emerging market assets.
On Tuesday, the rouble fell 11 per cent against the US dollar in intraday trading following an emergency 6.5 per cent interest rate undertaken by Russia's central bank just after midnight. While it eventually pared some of its losses and strengthened sharply on Wednesday after the central bank unveiled measures to forestall a liquidity crunch in the banking sector, it has fallen 20 per cent this month mainly because of the collapse in oil prices.
Russia's currency crisis has turned a deterioration in sentiment towards emerging markets into a sharper and broad-based sell-off - even in those countries that are net oil importers.
In a sign that investors are less discriminating about countries than they were just a few weeks ago, the Indian rupee and the Indonesian rupiah - two currencies that have proved extremely resilient partly because of the countries' oil-importing status - have fallen 2.3 per cent and 2.1 per cent since December 5.
Moreover, the Mexican peso - which despite the country's oil-exporting status is considered to be one of the most stable emerging market currencies because of the economy's relatively sound fundamentals - has fallen 4 per cent this month and is at its lowest level against the greenback in more than five years.