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3:46 pm
Mon March 3, 2014

Uncertainty In Ukraine Is Sending Markets Downward

Global markets have been dropping today as the situation heats up in the Ukraine. The Russian ruble has also been plummeting and Russia’s central bank reacted by raising its interest rates.

Cardiff Garcia of the Financial Times joins Here & Now’s Jeremy Hobson with details.

Guest

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Transcript

JEREMY HOBSON, HOST:

This is HERE AND NOW from NPR and WBUR Boston. I'm Jeremy Hobson.

And markets around the world have been dropping today as the situation intensifies in Ukraine. The Russian ruble took a dive compared with other currencies, and Russia's central bank reacted by raising interest rates. Joining us for a look at the economic impact of what's happening in Ukraine is Cardiff Garcia of the Financial Times. Cardiff, welcome.

CARDIFF GARCIA: Hey, Jeremy.

HOBSON: Well, first of all, what is the worry here in global stock markets today?

GARCIA: So I think the mechanism here is fairly straightforward, not just in stock markets but in other markets. So anytime you have something that's geopolitically destabilizing and it might have a big impact on a couple of big economies, essentially what you have is investors fleeing riskier assets like the stock market or, say, junk bonds, and they put their money in safe havens. So they put their money in U.S. Treasuries or in safe currencies like the U.S. dollar, or the Japanese yen or the Swiss franc. So that's a fairly straightforward way of looking at this.

But I think it's important to note that there are also other markets that impacted by what's going on. It could cost investors to worry that the selloff will spread to other emerging markets. So far, that hasn't happened on any big scale, but that's something they're constantly looking out for. And obviously, there are banking and trading linkages between Russia and other economies that economists are going to be focusing on.

And finally, especially in the case of Russia, depending on how bad things get and depending on whether we get to a really bad scenario where Russia is increasingly economically isolated, you might also end up with higher energy prices. Keep in mind that Russia is a huge exporter, both of natural gas and of oil. And so to the extent that it impact those markets then, I think you might see higher prices. And investors are starting to look at it now, and they might be getting worried ahead of time.

HOBSON: Well, we've heard, especially from Secretary of State John Kerry, who was on "Meet the Press" yesterday, about the possibility of sanctions on Russia. Let's listen to what he said.

SECRETARY JOHN KERRY: There could even be, ultimately, asset freezes, visa bans. There could be certainly disruption of any of the normal trade routine.

HOBSON: What kind of an impact would that have, Cardiff?

GARCIA: You know, it depends. It wouldn't have that much of an impact, I think, on the U.S., which is actually a relatively closed economy. It almost certainly have a big impact on Russia and on Ukraine and certainly on their neighboring countries in the region. It might also have an impact on EU. I think a lot of European banks have pretty big exposures to Russia. They could be impacted as well.

But I'd really emphasize also that it's just really hard to know. A lot of this depends on, you know, the extent of the geopolitical fallout, and that's just so difficult to predict. So you've got anything from a best case scenario where there's some kind of a diplomatic solution to a much worse case scenario where there's some kind of a confrontation in which case, I think, there are probably going to be unintended or unanticipated economic consequences that are just very hard to know in advance.

HOBSON: I mentioned earlier that Russia raised interest rates. Tell us about the calculation behind that.

GARCIA: Yes. I mean, one of the issues here is that a lot of Russian assets, Russian equities, Russia stocks were collapsing, and so is the ruble. And that was something that had actually started even before things in Ukraine became so bad. It started with the earlier emerging markets selloff. And the problem is that if the ruble collapses too much, then a lot of people, a lot of investors, a lot of, you know, Russian businessmen are going to be worried about potentially - potential inflationary consequences and just a worsening economic environment.

So the Russian central bank essentially wants to stop the ruble from falling so quickly, and essentially, what it does is it takes from its U.S. dollar reserves and it buys rubles on the open market in order to slow down the fall. And that's what they started doing so far and we'll see if they have to do more of it.

HOBSON: You know, it always makes sense, the things that are related to a place that is in turmoil like this, falling on the market. But I always wonder about if you look at stocks like a Chipotle...

GARCIA: Right.

HOBSON: ...down today, why, why, why? I don't understand it. We'll have to take that up another time.

GARCIA: Sure.

HOBSON: All right. Cardiff Garcia is a reporter with the Financial Times. Cardiff, thanks so much.

GARCIA: Thanks, Jeremy.

HOBSON: This is HERE AND NOW. Transcript provided by NPR, Copyright NPR.

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