Emerging-Market Crises Show Way for Russia: El-Erian

The third task relates to Russia’s access to an “external balance sheet” — that is, a large source of outside funding.

Most emerging economies in crisis — be they in Africa, Asia, Eastern Europe or Latin America — have required either the reality or the perception of sizable external financing to support adjustments in domestic policies. This has normally come in large part from an International Monetary Fund program that, in addition to providing direct financial support, brings in other official funding and private capital.

Given the tensions with the West over its interference in Ukraine, Russia is miles away from securing help from the IMF or other credible outside sources. Instead, it has no choice but to rely on its own $400 billion buffer in international reserves to meet multiple objectives.

The aims include stabilizing the currency, securing payments on its foreign debts, restoring liquidity to its banking system, alleviating the effects of a huge contraction in imports, slowing capital flight, and securing refinancings and new loans. It is highly unlikely that all these objectives can be met at the same time without dangerously depleting reserves.

The experience of prior emerging-market crises suggests that to restore durable economic and financial calm, Russia needs to do a lot more and not just on the domestic policy front. It would need to change course on Ukraine, open the way for constructive re-engagement with the West, and secure external funding. This is quite a list. 

Pending its satisfaction, we can expect alternating periods of financial dislocation and temporary calm. They will be accompanied by credit-rating downgrades, a worsening economy, higher inflation, controls on imports and capital flows, and shortages. In other words, Russia faces an especially dark winter.