[LONDON] The financial turmoil engulfing Russia is a symptom of a wider world markets quake that has its epicentre in oil's collapse and Western disinflation but is now rippling far and wide across investors' portfolios.
Not unlike other bouts of global financial contagion in the late 1990s and again in 2008-09, the growing interdependency of world finance means seismic activity in one area can often lead to a chain reaction of seemingly random events.
That is partly because fund managers are often forced to sell profitable parts of their portfolios to cover losses and redemptions in markets that are seizing up.
The plunge this week in Russia's currency, stocks and bonds has already been felt in credit markets on the other side of the planet and in assets and prices as diverse as US high-yield bonds, the Norwegian crown and shares in Slovenian drug makers.
Trading conditions in many assets have deteriorated as bid/offer spreads have widened and liquidity has dried up. Even the most liquid markets like US Treasuries and major equity indices have been more difficult to navigate, traders report.
Against the backdrop of a year-end position unwind, rising US dollar - it's up 10 per cent in the second half of the year against a basket of major currencies - and potential changes in US monetary policy, markets are especially jittery.
But even taking those factors into account, money strategists reckon there will be no change until the oil market stabilises.
"The decline in oil prices is the biggest factor here. It is a problem for policymakers and a problem for the world because it creates disinflation," said Nikolaos Panigirtzoglou, global market strategist at JP Morgan in London.
"No market is immune ... and until markets find an equilibrium for oil prices we are going to have a lot of volatility," he said.
A case in point is the US$1.38 trillion US junk bond market where some 16 per cent is energy company debt, exposing fund managers to losses potentially worth billions.
Likewise, shares in Slovenian drug maker Krka fell 9 per cent on Wednesday after it said on Tuesday the plummeting rouble could hurt its earnings this year.
Brent crude oil has dived 50 per cent since late June to below US$60 a barrel, its lowest since 2009 thanks to a mix of rising supply, falling demand and OPEC's decision last month not to cut production.
The impact on countries who depend largely on oil and energy exports for their national income has been severe. Norway's crown has slumped 12 per cent against the euro since the end of September, on track for its biggest quarterly loss in six years and second biggest in over quarter of a century.
Russia, also subjected to Western economic sanctions, is among the hardest hit, needing oil around US$100 a barrel to balance its budget.
The rouble has collapsed to a record low, losing 20 per cent against the dollar this week alone and the central bank this week hiked interest rates 650 basis points to 17 per cent.
The central bank will have to continue dipping into its dwindling international reserves to support the currency, and local banks and companies facing ballooning dollar-denominated debt repayments.
But that six-month period of collapsing oil prices has coincided with a rise in stress across markets, especially the currencies, stocks and bonds of the most sensitive countries.
Volatility in major markets has jumped too. Euro/dollar implied volatility has doubled and has trebled in dollar/yen, while US equity volatility has more than doubled.
Even the market for US Treasuries - often seen as the deepest, safest and most liquid in the world - has seen volatility rise significantly.
Nor is it a coincidence that the second half of this year marked a shift in market expectations on the world's three largest central banks' monetary policy paths during which the dollar has risen steadily.
Investors started to bet that the European Central Bank and Bank of Japan would pursue much more aggressive easing policy than had been priced in during the first six months of 2014, and the collapse in oil has muddied the 2015 outlook for the Fed's first interest rate hike.
That backs the view that the current volatility is as much rooted in developed markets as it is in oil-dependent and US dollar-pegged emerging markets.
"This is as much a G10 crisis as it is an EM "market"crisis," said Benoit Anne, head of emerging market strategy at Societe General in London.