Ruble in trouble: why the Russian currency is collapsing
Russia is rocked by a widespread currency crisis with its president, Mr Vladimir Putin, facing the most serious test of his leadership.
In a desperate attempt to bolster the currency, Russia’s central bank raised interest rates from 5.5% to 10.5%, to 17% on Monday, December 15 in hopes that global investors would stop selling their rubles . But this decision has just triggered panic in the financial markets.
At one point on Tuesday (December 16), the currency dipped to 80 rubles to the US dollar – down from around 30 at the start of the year – raising the specter of the Russian financial crisis of 1998, when the ruble collapsed , interest rates soared beyond 100 percent and the country was forced to default on its debts.
Russian newspapers warned in editorials on Wednesday that the country was steps away from a full-blown bank run as the ruble collapse could trigger consumer panic.
Here’s why the ruble turned to rubble:
1. Russia’s biggest export is oil and oil prices are plunging
Oil and gas account for 70 percent of Russian exports and half of government revenue, making the country vulnerable to falling prices.
Crude oil has lost about half of its value in the past six months. From over US $ 100 a barrel in June, Brent crude fell below US $ 59 on Wednesday, while West Texas Intermediate broke through the US $ 55 level.
This is a disaster for Russia, which can only balance its books if the price of oil is US $ 100.
Russia’s central bank predicts that the economy will contract 4.5% in 2015 if oil prices average US $ 60 per barrel throughout the year.
The fall of the ruble has also pushed inflation above 9% by making imports more expensive, hitting families and businesses. Russian-language stores are rapidly raising prices to cope with the falling ruble, and Apple has suspended online sales there, blaming the extreme fluctuations in the value of the ruble.
2. The Russian economy was already reeling from Western sanctions
In September, the United States and the European Union announced sanctions against Moscow’s involvement in Ukraine, causing a massive flight of capital.
The sanctions, which included blocking the access of major Russian companies to Western financial markets and restricting imports of certain technologies, would cause enough pain to put Russia into recession for a year or two, the economist then predicted. of the former Russian Minister of Finance Alexeï Koudrine.
Fears of a prolonged slowdown prompted investors to pull their money out of the country, hitting the ruble.
Then on Tuesday (December 16), the White House announced that US President Barack Obama would sign a bill authorizing more sanctions against Moscow, which will impose new sanctions on Russian arms exports and imports of oil production. .
3. The Perfect Storm
Falling oil prices have combined with the structural problems of the Russian economy – its economic destiny is too dependent on oil – and the effect of Western sanctions to create the “perfect storm” hitting the ruble.
If the price of crude oil continues to fall, it is only a matter of time before Russia again faces the prospect of defaulting on its debts as its reserves run out.
Russia has spent billions of its reserves at once on futile attempts to support the ruble. It spent nearly $ 13 billion (S $ 17 billion) in the first half of October alone, according to the Wall Street Journal.
As of December 12, Russia’s central bank had $ 393.6 billion in gross reserves. Meanwhile, its total outstanding debt stood at $ 642 billion, according to data from Credit Suisse. Russia has relied almost entirely on oil profits to pay off this debt – profits are now in jeopardy.
Some economists say Russia has come to the end of the road with interest rate hikes and using up its rapidly depleting reserves. It now has only two options: let the ruble regain its own level, in the hope that the drop in oil prices will be temporary, or introduce capital controls on its currency as Malaysia did with the ringgit when it was hit by the Asian financial crisis. crisis in 1997.
As bitter as it may be, it could be a pill Russia will have to swallow if the ruble rout continues.