After Monday's 100-point drop in the Dow Jones Industrials , the last thing bullish investors wanted to see was a foreign financial crisis to stir up further anxiety among global markets. Yet that's what they got Tuesday morning, as the plunge in world oil prices has proven to be the last straw in sending the Russian ruble to record lows and Russia's stock market down double-digit percentages. The most surprising thing, though, is that U.S. investors didn't panic at the potential replay of Russia's previous economic crisis in 1998, and as of 11:30 a.m. EST, the Dow was actually up more than 200 points.
What's happening in Russia?Russia's economy is heavily dependent on natural resources, so the plunge in oil prices over the past few months poses a huge threat to its economic prosperity. Because Russia relies on the foreign currency that sales of oil and other natural resources generate, foreign-exchange traders have lost a lot of confidence in the Russian ruble. Just since mid-year, the ruble has lost more than half its value against the U.S. dollar, and many market historians are looking back at how the last time Russia had similar economic troubles 16 years ago, the U.S. stock market lost more than 20% in a matter of months in response to the geopolitical and global economic tensions that the episode caused. Even the response from the Russian central bank to raise interest rates to 17% didn't drive much interest in the ruble.
Source: Wikimedia Commons, courtesy Bernt Rostad.
Yet the fact that U.S. stocks are soaring shows just how different the picture is these days. Some investors expect the Federal Reserve and other policymakers to respond to trouble in Russia by continuing their policy of monetary accommodation, which they believe could spur stock prices still higher. Certainly, with oil prices having fallen so much, inflationary pressures appear to be a non-issue for the foreseeable future, freeing the Fed to keep interest rates lower than they otherwise would.
Interestingly, even some companies that are directly exposed to Russia are responding favorably. Within the Dow, ExxonMobil is up more than 2%, despite the fact that it has invested heavily in potential projects in the Russian Arctic. At least so far, investors aren't jumping to the conclusion that Russia will make a dramatic reversal from its embrace of capitalist standards by taking measures like nationalizing assets.
Even more importantly, Russia makes up a relatively small portion of the global economy. It's large enough to have a major influence, especially in the natural-resource markets. But by itself, temporary disruptions appear unlikely to have considerable long-term impacts. After all, back in 1998, the stock market's plunge turned out to be a huge buying opportunity, with the market recovering from its losses quite quickly. Many companies both within the Dow and elsewhere in the stock market do almost no business with Russia, diminishing the country's impact on their results.
An economically unstable Russia increases the overall risk level in the investing world, and investors shouldn't take the Dow's positive move today as a sign that what's happening in Russia is unimportant. At the same time, though, you shouldn't lose sight of the long-term positive prospects for many American companies as they expand into the global economy. Unless the Russian situation devolves into a disorderly collapse, it shouldn't pose a major threat to the health of the U.S. stock market in the long run.
The article The Dow Shakes Off Russia's Financial Crisis and Soars -- for Now originally appeared on Fool.com.
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