Russia is embroiled in the instability in the Ukraine, although it strenuously denies that it has troops on the ground in the neighbouring state. The Ukrainian authorities would take issue with this declaration, but for the time being, a shaky truce is more or less holding in the troubled east of the nation. The crux of the instability is whether Ukraine (and its ethnic regions) should be forging closer ties to Europe and reduce Russian influence, or not.
The West is convinced that Moscow has been fomenting unrest in The Crimea which voted to rejoin Russia in a referendum which was not accepted internationally, and in the east of the country. This is the justification that Western powers have cited for a raft of economic sanctions designed to put pressure on Russia to desist from its actions and support a dialogue within Ukraine.
The sanctions naturally also have an effect on EU/Russian trade and have been identified as a reason why the German economy has slowed since Russia is an important German trading partner and, of course, Russia has threatened to retaliate against what it sees as an unwarranted Western move.
The upshot of this is that the Rouble has fallen substantially against major currencies since the start of the crisis. In May 2012, one US Dollar would buy 29.6 Roubles: it is currently buying a shade under 41 Roubles.
Ratings agency Moody’s has cut Russia’s credit rating to Baa2 which is still an investment grade rating, but is the second lowest rating possible whilst remaining investment grade. It is likely to mean that Russian borrowing costs will rise if it seeks to raise money on international money markets. In a statement explaining its decision, Moody’s noted: “The tightening of sanctions against Russia has already begun to aggravate the slowdown in economic growth and to undermine consumer and investor confidence in the country. Domestic demand slumped in the second quarter, including a notable decline in inventories and investment.”
The ratings agency believes that the effect of the sanctions will be to cause the Russian economy to contract this year and probably for the first half of 2015.