The financial chaos in Russia is giving investors flashbacks to the summer of 1998.
That was the year Russia defaulted on its debt and devalued the ruble, creating huge losses for investors. And it didn’t stop there: the “Moscow meltdown” infected emerging markets around the globe and even caused America’s S&P 500 index to plunge about 20% between July and October of 1998.
Conditions today look a lot like they did back then: the Russian ruble is collapsing under the weight of plunging oil prices, forcing the central bank to dramatically hike interest rates.
Despite the eerie similarities, Russia’s financial troubles are unlikely to crash global markets this time around.
One major difference between 1998 and today is that tough sanctions on Moscow have somewhat insulated Western investors from what’s ailing Russia.
The sanctions regime has “reduced the risk for financial contagion considerably. This is not 1998. You don’t have the same level of interconnectedness,” Michael Levi, a senior fellow at the Council on Foreign Relations, said at a Control Risks seminar on Wednesday in New York.
Russia is a ‘pariah’ today: Russia simply doesn’t have the ties to the rest of the financial world anymore to really make it sick.
“It’s basically a pariah state right now. Foreign investors have fled,” said Win Thin, global head of emerging market strategy at Brown Brothers Harriman.
There are other key differences between today and 1998.
Learning from its last default, Russia has stockpiled a war chest of about $416 billion in currency reserves. That’s more than enough to cover all of the debt due in the next year.
It also allows Moscow to deploy cash to defend the ruble, as it did again on Wednesday.
‘Shock absorber’ U.S. investors should also be glad that Russia’s currency is “freely floating,” meaning it’s not pegged to the dollar like it was last crisis
“That means if the currency experiences a shock, like a further fall in oil prices or additional sanctions, that shock is likely to be absorbed in the exchange rate. It helps isolate the pain to Russia itself and doesn’t spread it to the rest of the world,” said Paul Christopher, chief international strategist at Wells Fargo Advisors.
Unlike in the late 1990s, many other emerging markets have also moved to freely floating currencies.
“That’s the shock absorber,” said Thin. “The wider EM systemic risk is not the same as it was.”
Financial problems can also spread around the globe through foreign trade. If one major country gets sick, it can infect its major trading partners.
While Russia is a big energy exporter to Europe, experts don’t believe its trade ties rise to the level of a threat to the whole of Europe.
Not a safe bet: Of course, global investors need to closely monitor what Russian President Vladimir Putin does next. It’s possible Putin rattles global markets through new military action aimed at ginning up more nationalistic support at home.
“We have real concern that you’ve got a situation where there’s a regime that feels cornered,” said Michael Moran, a managing director at consulting firm Control Risks.
That’s one reason why even though Russia doesn’t seem to pose the systemic risks as it did in the late 1990s, the country still looks like a risky bet.
“The Russians will do what they can to stave off a crisis for as long as possible. That affords investors the opportunity to get out of Russia while they can. That’s what I would recommend,” said Christopher.
