Russia's Financial Markets don't seem to Like Vlad's Excursions into Ukraine

Russia's incursions into Ukraine are causing its financial markets and economy real pain. 

The Russian MICEX stock index has fallen 12% from its Feb. 17 high, despite a 1% gain Wednesday. "It's boomeranged on them," says John Krey, international markets analyst at S&P Capital IQ. "It's a mess." \ 

Money is fleeing Russia, which is stalling its economic growth because it depends on foreign capital to keep its industry running. "It's still a relatively poor country," Krey says, and it's suffering from years of misrule under communism.

In the wake of Russia's annexation of Ukraine's Crimean Peninsula, Moscow had to hike its key lending rate 1.5 percentage points and spend $11 billion, or 2% of its reserves, to stabilize the ruble, Krey notes. More of those actions could be needed if Russia creates new tensions with the West by making further moves into Ukraine.

Russian Economy Minister Alexei Ulyukayev told parliament Wednesday that growth was only 0.8% in the first quarter — far short of the ministry's earlier prediction of 2.5% — because of "the acute international situation of the past two months" as well as "serious capital flight."

The weakening ruble simply hastens capital flight from Russia. To foreign investors, Russia's depreciating currency simply adds to their losses. For example, in U.S. dollar terms, the Russian stock index is down nearly 20%.

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