More Central Bank Panic: Russia, Serbia Cuts Interest Rates

Central bankers around the world have been resorting to crisis resolution measures of aggressively slashing rates (and other easing measures)…

Last night Russia announced a 100 basis point cut

From Bloomberg: (bold mine)

Russia’s central bank lowered its main interest rate and signaled more policy easing ahead if inflation continues to ease as the economy buckles under low oil prices and sanctions over Ukraine.

The one-week auction rate was cut by one percentage point to 14 percent, the central bank said in a statement on its website Friday. Seventeen of 32 economists in a Bloomberg survey predicted the move, with nine seeing no change and five forecasting a bigger reduction. Another analyst predicted a half-point cut.

The Bank of Russia is pressing ahead with monetary easing after a surprise 2 percentage-point cut at its January meeting as weekly inflation decelerated. Even with price growth more than fourfold its mid-term target, the regulator is responding to calls from business to unwind December’s emergency increase to 17 percent to buoy an economy entering its first recession in six years.

The first and second rate cut follows an earlier emergency rate hike last December intended to stanch capital flight out that has battered her currency the ruble. (chart from tradingeconomics.com)

The December sell-off or the ruble, see USD-RUB (from Google Finance) has apparently been in a hiatus.

As I explained here and here, despite relatively lower levels compared to developed  economy contemporaries, Russia has her own debt problems. And thus the central bank’s response “to calls from business to unwind December’s emergency increase” via rate cuts.

The problem has been that those rate cuts (with more to come) are likely to rekindle a weaker ruble and place the Russian economy in a indeterminate juncture.

Now Serbia's version. From another Bloomberg report: (bold mine)

Serbia’s central bank cut its benchmark interest rate for the first time since November as it fights a recession and the threat of deflation amid the government’s effort to tame the budget deficit.

The National Bank of Serbia lowered its one-week repurchase rate by half a point to 7.5 percent, it said in a statement on its website. Six of 23 economists surveyed by Bloomberg predicted a quarter-point reduction, eight forecast a half-point cut and nine expected no change.

Policy makers reduced the cost of borrowing amid “increased global liquidity as a result of the ECB’s quantitative easing” program, the bank said in a statement on its website. They also took into consideration “fiscal consolidation measures and structural reforms, as well as the conclusion of the International Monetary Fund program.”

With one of the highest benchmark rates in emerging Europe, Serbia’s central bank is caught between trying to help the economy emerge from its third recession since 2009 while also shoring up the dinar, which fell after the bank’s November move. Last week, non-executive central bank Chairman Nebojsa Savic said policy makers should hold rates at least until May, when the International Monetary Fund arrives to review Serbia’s compliance with conditions of a stand-by loan.

The following charts help explain the decision

Consumer credit has been exploding…

Meanwhile the spendthrift government has widened the fiscal deficit

And such reckless government spending financed by debt has helped increased the debt burden of the nation

Add to this the chronic deficit in her current account which means Serbia has been consuming more than producing

Unfortunately all those debt financed consumption spending has weighed on her annual gdp where Serbia’s economy has been mired in a twin recession of 2012 and 2014 (third or triple dip if to consider 2009)

Serbia’s stock market appears to ignore the 2014 recession because they have been in an uptrend since 2012

Yet part of the debt financing of consumption has been through external channels which has spiked over the past few years…

The problem with toying with money and credit is that there will be an outlet where accrued imbalances will be vented. And thus far this has been through a crashing currency the Serbian dinar via Google Finance USD-RSD.

And while rate cuts may temporarily ease the burden of domestic debt, this will likely put pressure on the dinar which will amplify pressures on her external liabilities.

So when media reports that Serbia has been "caught between trying to help the economy emerge from its third recession since 2009 while also shoring up the dinar"...this really is a symptom of a debt trap.

Debt is no free lunch.

As for why I believe central banks will be cutting rates I previously explained here.

This marks the 24th rate cuts by global central banks according to CBRates.com. 11 last January, 7 in February and 6 for March with more to come. The tally reflects only on official rate cuts and not other easing measures applied.

Record stocks in the face of record imbalances at the precipice.

Russia’s Collapsing Ruble is a Textbook Example of Fiat Inflation

Last February I noted that “Russia suffers from both property bubble fuelled by credit inflation and runaway local government debt”, such that a domestic turmoil had already been occurring even outside the current collapse of crude oil (which began last July) and sanctions imposed by Western nations. Economic sanctions came a month after. 

The Russian ruble has already been plagued by capital flight from residents rather than from foreigners. I warned too “The point worth repeating is that every conditions are unique and that there are no “line in the sand” or specific thresholds before a revulsion on domestic credit occurs”

Presently, as the ruble collapse continues, the average Russians have reportedly been concerned over the risks of  bank runs

At the Mises Blog, Carmen Elena Dorobăț lucidly explains the growing risk of what  I warned earlier as “revulsion on domestic credit” on Russia as textbook symptom of fiat inflation (bold mine)

In January 2014, 33 Russian rubles exchanged for one US dollar. In December 2014, the amount has more than doubled, reaching 77.2 rubles per dollar on December 16^th, a day some dubbed Russia’s Black Tuesday. Russian central bankers raised interest rates by 6.5% overnight, and spent $2 billion to stave off the depreciation. In total, propping up the currency has cost $10 billion since the beginning of the month, and $70 billion since the beginning of the year.

In spite of it all—or because of it all—Russia’s problems are far from over. Default looms closer, as its foreign (public and private) debt is estimated at around $600 billion, and foreign-currency reserves only at $300 billion. The government appealed to the public to be ‘calm and rational’, stressing the need to keep rubles and sell foreign currency. Russians did however go to buy more durable goods, such as cars and home appliances; and although there’s no flight into real goods yet, the tendency is forming in that direction.

The media, economists, and Putin himself blamed Western financial sanctions over the Ukraine conflict—together with other ‘nuisances’ such as oil prices—for Russia’s woes. Indeed, these factors precipitated the slide in purchasing power: sanctions made many local companies unable to refinance their dollar debts, and low oil prices drained some of Russia’s foreign currency reserves. With fewer (and more expensive) imports, rubles were spent and re-spent on domestic goods, where they bid up prices and led to double-digit inflation. But at the bottom of it lie, as you’d expect, mainly monetary factors. Over the last 16 years, the Bank of Russia’s balance sheet rose from about 9 billion rubles to 2.1 trillion this month (an all-time high), while monetary aggregates increased up to a factor of 30 over the same period. Part of the new money was printed to directly fund (military) industries or state-owned companies.

In this light, Russia’s case isn’t special, but just a textbook example of currency collapse due to fiat inflation. It resembles the more recent experiences in Argentina or Venezuela, as well as a possible future of the United States, if for some reason or another the dollar can no longer make its way into foreign (Chinese) bank vaults. But it is nevertheless an interesting development for two reasons. First, it shows just how important international central bank cooperation is for the inflationary policies of national governments. At the moment, Russia cannot rely on other monetary authorities to pressure their banking systems into rolling over its debts. Nor can it rely on an IMF loan, as it did in the 1998 emerging market crisis. Its tensioned political relations have left it alone to pick up the pieces of its reckless monetary policy.

Second, it would seem that both the media and the general public are most disillusioned with a government that loses control over the monetary system. As a result, this week has been perhaps the only time over the last year when Putin’s grip on power has been in doubt. It’s no surprise, however, given that in a world of fiat currencies, bank notes are only backed by other bank notes, and by a fickle, passing trust.

As I wrote below “Take away credit and liquidity, confidence dissipates which means that the whole structure collapses.” This applies not only to stocks but to the incumbent monetary system.

Relentless Run in GCC’s Stock Markets and in Russian Financial Assets! Japan Import Growth Shrinks as Exports Slow

Last night, European crude benchmark Brent resumed its hemorrhage and was down 1.96% while the US counterpart the WTIC bounced .18%

And the incredible stampede out of GCC stock markets continues…

(table from ASMAinfo.com)

Last night too, Saudi’s Tadawul and Dubai Financial crashed by another 7.27%. Qatar, Muscat and the Kuwait slumped by 3.51%, 2.92% and 2.08% respectively. All these adds to Sunday December 15th crash!

Once record high stocks is being dismantled at an astounding speed and stupefying rate of decline. The obverse side of every mania is a crash.

Oh by the way, Western banks have reportedly cut cash flows to Russian banks, as the Zero Hedge noted “FX brokers advised clients that any existing Ruble positions would be forcibly closed out because "western banks have stopped pricing USDRUB", over concerns of Russian capital controls.”

The article further quotes the Wall Street Journal "global banks are curtailing the flow of cash to Russian entities, a response to the ruble’s sharpest selloff since the 1998 financial crisis."

So along with plummeting oil prices and economic sanctions, the liquidity squeeze exacerbates the stunning run on Russian financial instruments. At the rate of the evolving Russian financial market turmoil, the odds of a default has been soaring as revealed by the skyrocketing CDS or the cost to insure debt as shown in the chart above.

“Curtailing the flow of cash” reveals how global liquidity is being drained. If risk assets are about liquidity, credit and confidence that the latter two generates, then the shriveling liquidity flows poses as increased structural headwinds on risk assets. If sustained then  asset inflation will turn into asset deflation.

My final note

Last November, Japan export growth year on year has underperformed consensus expectations despite the crashing yen.

The USD-Yen has been up by  14.7% since the BoJ GPIF bailout of the stockmarket

Export growth fell by 4.9% and has been in a decline since November.

This is another evidence which debunks the popular mercantilist “weak currency-strong export” myth peddled by the consensus.

Also Japan’s import growth has collapsed again. It has CONTRACTED by 1.7% over the same period. The slump in imports reflects the demand conditions in the Japanese economy.

This represents the "wonders" of Abenomics--doing the same thing over and over again and expecting different results.

Additionally, Japan's imports are someone else’s exports. Japan represents the largest export market for the Philippines as of 2013. Contracting imports means marginal growth or even zero or reduced exports for the Philippines to Japan!

As I noted last weekend,

...one nation’s imports signify as some other nation’s exports. As noted above, Chinese import growth contracted in November (y-o-y), Germany’s import growth rate also CONTRACTED 3.1% month on month in October. For the Philippine bulls who sees virtually no risks, but all glory from credit fueled levitated assets, how will collapsing Chinese and German demand for imports, affect domestic exports? Do they know? In 2013, exports to China ranked third of Philippine exports with 12.4% share and Germany ranked sixth with a 4.1% share. Signs are already here, Philippine export growth rate collapsed to 2.9% in October from the stellar over 10% growth rate during the past four months, specifically 15.7% in September, 10.5% in August, 12.4% in July and 21.3% in June. Add these to the collapsing markets of the GCC, which places OFW remittances at risk. So where will demand come from? Domestic demand has already been constrained by credit overdose as revealed by investments on a downtrend, and by growth in credit and statistical economy that has been moving in opposite directions, and by consumers harassed by BSP’s invisible redistribution favoring the political and economic elites. So where will Philippine statistical growth come from? Statistical massaging? Or manna from heaven?

The world economy has been deteriorating, liquidity has been shrinking, yet domestic bulls are expecting G-R-O-W-T-H!

Pride goes before destruction, a haughty spirit before a fall (Proverbs 16:18)

Said differently, a fool and his money are soon parted.

Global Stock Market Rout Continues, Russian Government Hikes Rates from 10.5% to 17%!

European stocks started strong, but ended the day in another carnage as oil prices continued its free fall. European Brent oil sunk 1.03% as US WTIC collapsed 3.62%!

The table from Bloomberg says it all

UK’s FTSE now at October levels, the French CAC just a few points away from the same area, the German and the European Stoxx600 likewise in a steep fall.

Interestingly, in order to stem capital flight and the collapse of her currency the ruble Russia’s central bank stunningly hikes official policy rates from 10.5% to 17%!

From the Bloomberg:

Russia’s central bank raised its benchmark interest rate the most since the nation’s 1998 default, making the announcement in the middle of the night in Moscow as policy makers seek to douse investor panic and stem a ruble rout.

The central bank increased the key rate to 17 percent from 10.5 percent effective today, it said in a statement on its website. Policy makers gathered for an unscheduled meeting after a one-point increase on Dec. 11.

“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the bank said in the statement.

Russia’s central bank raised interest rates for the sixth time in 2014 after more than $80 billion spent from its reserves failed to stop a 49 percent selloff of the ruble, the world’s worst-performing currency this year. President Vladimir Putin, whose incursion into Ukraine’s Crimea peninsula in March prompted the U.S. and its allies to strike back with sanctions, this month called for “harsh” measures to deter currency speculators.

The chart above of the USD Russian (RUB) gives an idea of how the ruble has recently been smashed from collapsing oil prices exacerbated by economic sanctions imposed against Russia  by Western political economies.

The stunning rate hikes will hurt domestic debt holders!

Oh by the way, speaking of crashing currencies, neighboring Indonesia’s currency the rupiah has now reached record lows. Or alternatively said the USD- Indonesia IDR is at record highs!

The USD Malaysian ringgit (MYR) seems headed that way too!

Financial pressures have reared their ugly heads in ASEAN financial markets

Meanwhile US stocks was partly affected by the European stock selloff…

Oh don’t worry be happy. Philippine stocks will rise forever!

Middle East employers of OFWs will NOT be affected by the current financial market crash. Shrinking global trade will NOT impact demand for local goods. Slowing GDP has been an ANOMALY which means harried consumers (from BSP's inflationism), declining investments and slowing output have signified as aberrations or temporary dislocations. Debt can perpetually rise WITHOUT consequence of impairing balance sheets of the consumer and mostly of the highly levered supply side firms (mostly owned by domestic plutocrats). Falling peso and regional currencies will hardly will affect decisions of foreigners on their portfolio holdings of Philippine stocks, bonds, properties and currency, or simply stated, profits and losses or economic calculation have now been VANQUISHED! BSP actions of two interest rates and, SDA hikes and requirements to raise bank capital plus the ongoing depletion of GIRs (combined with the other flows that didn’t appear in the GIRs) to defend the Peso will have NO impact on liquidity conditions. Property prices can only rise forever WITHOUT real economic dislocation where the law of demand has been REPEALED!

Don’t you see we have reached economic nirvana! No amount of global meltdown will stop the domestic stock market boom. That’s what stock market operators, who has been rigging the markets with impunity, wanted to show!

China’s First Default and Export Collapse; Russia’s Financial Meltdown

China’s First Default and Export Crash

A few hours after the close of the Friday’s trading session in Asia, news announced of the first China onshore default on bonds[1]. While the manic US stock markets seem to have shrugged this off, it is unclear if Asian markets will also disregard this. 

Even worse, after the close of the trading hours in US, the Chinese government announced[2] of a steep 18.1% decline in exports!!! I would say that 18% EIGHTEEN PERCENT represents a collapse and not just an ignorable drop.

The export crash has brought about China’s trade balance into a massive deficit. Yet both the degree of export volume breakdown and the scale of deficits matches or has even been larger than during the global crisis of 2008 (see red ellipses). Whether this represents an anomaly or signs of the deepening and acceleration in the deterioration of China’s economy has yet to be established. But I suspect the latter.

Why?

Because as I have been pointing out, such is how the bubble cycle unfolds.

The first stage; financial market disruption. Then, liquidity squeeze. Lastly, either a financial crisis that brings about an economic crisis or vice versa. The Chinese markets had her financial market disruption episode in June 2013. Then the attendant spike in interest rates underscored on the liquidity squeeze which the Chinese central bank has been intensely firefighting with liquidity administration[3].

Now the real world contagion.

In 2014, we seem to be witnessing the combination of financial market disruption and real world economic problems, particularly, the first trust bailout[4] in late January, the unreported January quasi-‘bank run’ on three cooperatives which just surfaced last week[5], the reversal of the one way yuan trade[6] and now both the first default and export meltdown. In barely three months, accounts of financial-economic convulsion appear to be increasing in frequency and intensity.

Remember, Chinese ‘zombie’ non-financial companies with debt-to-equity ratio exceeding 200% have reportedly jumped from 57% to 256 from 163 in 2007 according to a report from Bloomberg[7]. This implies of the potential scale of the risks of defaults, not to mention the risks from $3 trillion of local government debt and China’s shadow banking industry estimated[8] between $7.5 trillion (JP Morgan) and $15 trillion (Fitch’s controversial Charlene Chu)

So aside from higher cost of funding which results to dislocations in economic operations and subsequently engenders an economic slowdown, a feedback loop of slowing economic growth magnifies on the debt problem by aggravating access to funding which translate to higher costs of financing.

This is why the first default has been analogized by some mainstream pundits as China’s ‘Bear Stearns moment’ as climbing rates and the risks of payment delinquency will pose as major roadblocks to interbank lending that increases default risks. 

And it is important to point out that in contrast to the external account talisman that the mainstream uses to justify their worship of bubbles, in China’s case surpluses dramatically morphed into deficits. In addition, China’s record forex reserves hardly serve as an adequate shield to a DEBT problem issue.

As I have projected at the start of the year, China’s unwieldy debt conditions may trigger a Global Black Swan event[9].

Evolving events have been indicative towards such direction.

Russian Financial Markets Meltdown

And this has not just been a China affair. Financial strains in emerging markets have been sporadically spreading. While ASEAN’s pressures may seem to have eased (I say temporarily), Russia suffered a financial market meltdown last week.

It would be misguided to treat or impute Russia’s problems to entirely the Ukraine standoff. As I pointed out earlier, in contrast to mainstream understanding which views the weakening Russian ruble as foreign money instigated[10], this has been mostly a resident capital flight phenomenon[11]. The falling ruble existed even prior to Russia’s troop build up in Crimea.

The intervention by the Russian government has only aggravated such conditions. And in trying to preempt the outflows from a deepening corrosion of sentiment, Russia’s central bank Bank Rossii hiked interest rates by 150 basis points. The result has been a horrific (12%) one day crash in stock market, bond markets and even the ruble[12]. All the stock market gains accumulated from June of 2013 vanished in just one day. Russia’s stocks as measured by the MICEX closed the week down 7.29% which means about 40% of the losses have been recovered. Dead cat’s bounce, perhaps?

And all it takes is for political maelstrom to expose on the real issues: DEBT.

And again despite the huge forex reserves of both China and Russia, worsening credit conditions have overwhelmed or negated any so-called advantages.

And to put into perspective from the heavily biased reporting seen in most of mainstream media about the geopolitical impasse between the US and Russia, under the previous terms and agreement by Ukraine and Russia, Russian troops “has been allowed to keep up to 25,000 troops on the Crimean Peninsula”[13]. Now whether troops operating outside the bases are legitimate or not is subject to anyone’s interpretation.

But so does interpretative conundrum apply to the historical attachment of Crimea with Russia. Crimea had been a part of the Russian empire in 1783 way until the General Secretary of the Communist Party in Soviet Union ‘Ukrainian’ Nikita Khrushchev transferred in 1954 “the Crimean Oblast from the Russian Soviet Federative Socialist Republic to the Ukrainian Soviet Socialist Republic” notes the Wikipeida.org[14]. Ukraine became independent[15] from the Soviet Union following the latter’s dissolution in 1991.

So the Crimean political crisis is a complex issue being oversimplified by media.

I would like to also further note intervention has been a two party affair. Early February news leaked of the hacked phone conversation between US Assistant Secretary of State Victoria Nuland and US Ambassador to Ukraine Geoffrey Pyatt in actively plotting over the ouster of the previous Ukraine leadership[16] and of the prospective instalment of their candidates.

And Ms. Nuland also reportedly confirmed according to UK’s Guardian “that the US had invested in total "over $5 billion" to "ensure a secure and prosperous and democratic Ukraine" - she specifically congratulated the "Euromaidan" movement[17].”

So the pot calls the kettle black.

The Contagion Link

 

Going back to economics, in terms of trading linkage, ASEAN represents the fourth largest trading partner of China[18] (left window). The EU has been both the largest trading source for China and Russia. China is the second biggest trading partner of Russia[19] (right window). So a China and a Russian economic downturn imply that the biggest damage will be on the EU.

And that’s just the context of trade and doesn’t cover capital flows.

The implication of China’s export meltdown is that the global economy may have taken a sharp downturn in February. This will be reinforced by Russia and all other Emerging Markets (Turkey, Brazil, India, ASEAN and etc…) recently hit by the yield spread disorderly adjustments.

And as of December 2013, according to the Philippine National Statistics office, China has been the largest source of Philippine imports[20] and the second largest export market[21].

And as I previously mentioned US and European banks have intensely increased bank lending to emerging markets[22].

So should China and or Russia’s financial-economic turmoil escalate, the idea that the ASEAN or the Philippines will be immune from this will just seem utterly delusional. Or the fugazi.

---

[1] See China’s First Onshore Default! March 7, 2014

[2] Bloomberg.com China’s Feb. Exports Unexpectedly Decline in Blow to Confidence March 9, 2014

[3] See PBoC Injects 255 Yuan to Calm Debt Jitters, Asian Stock Market Celebrate January 22, 2014

[4] See China Rescues Troubled Trust Product January 28, 2014

[5] See China’s Bear Stearns Moment? First Bond Default Looms March 6, 2014

[6] See Has the Falling Yuan and Tumbling Chinese Stocks Been Signs of Capital Flight? March 3, 2014

[7] Bloomberg.com Zombies Spreading Shows Chaori Default Just Start: China Credit March 7, 2014

[8] See Global Markets: How Sustainable is the Recent Risk ON? February 17, 2014

[9] See Will China Trigger the Black Swan Event in 2014? January 20, 14

[10] See Behind Russia’s Central Bank’s “Unlimited Intervention” January 31, 2014

[11] See Emerging Market Turmoil: The Fallacy of Foreign Currency Reserves as Talisman February 3, 2013

[12] See EM Crisis Over? Explaining the Meltdown in Russian Financial Markets March 4, 2014

[13] Voice of America Russian Forces in Crimea: Who Are They, Where Did They Come From? March 5, 2014

[14] Wikipedia.org Crimea Early History, Independent Ukraine

[15] Wikipedia.org Ukraine independence

[16] Euronews.com US embarrassed by apparent hacked phone call dismissing EU on Ukraine February 7, 2014

[17] The Guardian Ukraine crisis is about Great Power oil, gas pipeline rivalry March 6, 2014

[18] Wikipedia.org List of the largest trading partners of China

[19] Wall Street Journal Lawmakers Pass Russia Trade Bill November 16, 2012

[20] Philippine National Statistics Office External Trade Performance: December 2013

[21] Philippine National Statistics Office Merchandise Export Performance : December 2013

[22] See Emerging Markets: Why Adjustments For Relative Yield Spreads has been Disorderly February 17, 2014

EM Crisis Over? Explaining the Meltdown in Russian Financial Markets

In contradiction to the consensus outlook whom sees that EM volatility as just an aberration, well three months into the year, from China to Thailand to Ukraine to Kazakhstan, yet we see another financial market seizure: This time it is on Russia. 

The Russian Central Bank, Bank Rossii declared a 150 basis point hike in interest rate last night, from Bloomberg:

Russia raised its main interest rate the most since 1998 as the currency plunged to a record and investors pulled money from the stock market on concern that President Vladimir Putin will invade Ukraine.

The one-week auction rate, the benchmark introduced in September, was increased temporarily to 7 percent from 5.5 percent, the Bank Rossii said on its website today. The regulator also temporarily raised its other major lending rates by 150 basis points, or 1.5 percentage points.

The response has been a ghastly havoc in Russia’s financial markets

The Russian equity index the MICEX collapsed by a staggering 10.79%!!! 

The MICEX meltdown represents another wonderful example of “volatility in both directions but with a downside bias”. Months of accrued gains only to vanish in one day.

Russian bonds were also crushed! Yields of 10 year Russian bonds soared by 54 points.

Adding insult to injury has been a rout in Russia’s ruble (vis-à-vis the US dollar). The Russia's central bank, the Bank Rossii has been reported to have sold $10 billion worth of US dollar and raised interest rates. The ruble sank by a record 1.8% last night, bringing back the specter of 1998 as noted by the article.

It’s easy to blame Russia’s military involvement in Ukraine’s political quagmire as possible proximate cause, but as a bank analyst rightly commented "But today's price moves are hardly related to Ukraine exposures. What's happening today is that people are factoring in higher country risks" for Russia”

But the most important issue is; why would a 150 basis point hike spur a stampede out of Russian assets?

Well the answer all boils down a four letter word which the consensus shun at: DEBT

Political and economic uncertainty from Russia’s intervention in Ukraine signifies only a secondary cause or an aggravating circumstance acting as the release valve for what has been a seething buildup of economic and financial imbalances. 

Russia’s predicament has become evident even as early as late January when the Bank of Rossii announced “unlimited intervention” in the face of EM convulsions and a suspension of deposits from a local bank MY Bank.

Then I asked “The question is will this serve as a temporary patch or will this enough to calm Russia’s financial tantrums?” 

Well yesterday’s actions seem to have provided an answer. 

I also noted that Russia’s dilemma—contra mainstream expectation—has centered on resident capital flight. The weakness of the ruble has been a resident, and barely, a foreign instigated dynamic. And the Ukraine political impasse will only compound on this. Because not only residents will see increasing uncertainty as a factor in influencing Russia’s credit quality conditions, foreigners will likely exacerbate on this. Thus the meltdown.

From the same Blooomberg article above:

Foreign reserves fell to a three-year low of $490 billion on Feb. 7, a week after Deputy Economy Minister Andrey Klepach said that capital outflows may reach $35 billion in the first quarter, more than half of the $63 billion that left Russia in all of last year. Reserves have since risen to $493 billion.

So by raising interest rates, the Bank Rossii hopes to stanch the outflows by preempting them. Weak ruble will mean higher rates, so Bank Rossii gave it to them in one shot.

The question now is the how will the hike in interest rates affect the highly indebted entities, including Russian local governments? Will defaults become an issue? Will defaults spread or will they be constained? How will the Russian government respond to such a scenario? Bailouts? Massive inflation?

Importantly, for those in the consensus who thinks that huge foreign reserves, surpluses in current account and balance of trade should function as a talisman against the debt demon, well it appears that in Russia's case such expectations have proven to be a myth. 

A Moscow Times headline noted that Russian banks can easily absorb credit losses in Ukraine: 

Moody's estimated in a December report that the exposure to Ukraine of four Russian banks — Gazprombank, Vneshekonombank, Sberbank and VTB — was about $20 billion to $30 billion.

Another Wall Street article downplays European Bank exposure on Russian debt

Ukraine's impact on western European banks will be more limited than it would have been in the past, as direct cross-border exposures are less than half their level in 2008, said Elena Romanova, an analyst with Raiffeisen International. Prior to the financial crisis, European banks were chasing market share in what they perceived to be one of the continent's last high-growth markets. However, those banks now hold less than 20% of Ukrainian bank assets.

But such optimistic perspective appears opposite to how the financial markets responded last night.

European banks, as measured by Euro Stoxx Banks, got crushed also last night down by a terrifying 3.84%.

Add to this Germany’s major bellwether the DAX was also hammered by 3.44%.

While the above may just be a knee jerk reaction, which I think is not, they serve as a lucid paradigm of the transmission mechanism from the periphery-to-the-core phenomenon.

The end of the EM crisis? Hardly. 

All these represent a process unfolding over time. First, financial market disruption. Next, liquidity squeeze. Then, either financial crisis that leads to economic crisis or vice versa.

All these increasing incidences of emerging market turmoil signifies just an appetizer to the forthcoming global Black Swan event.