ANDREW ARENS, World Report News, 15 June 2015 - In December 2014, the Russian Ruble suffered its largest loss since the 1998 economic crisis in Russia. What began as a slow, gradual weakening in early 2014 in the wake of the invasion of Crimea gradually accelerated into a steep decline by December. Much had changed in Russia since the 1998 financial crisis, a crisis when Russia defaulted on its debt and experienced hyperinflation, the result of several years of economic decline following the collapse of the Soviet Union. Preceding the Ruble crisis, however, it had experienced fifteen solid years of growth (excepting 2008), and became the world’s largest oil producer.
As Russian troops occupied Crimea, the fall of the Ruble began slowly, but gradually picked up pace until it began to look like a classic currency meltdown. The cause was a perfect storm of both steeply declining oil prices and the imposition of international sanctions on Russia. Although both factors played a role in the fall, the 50% decline in oil prices was particularly influential. Because the Ruble is a petrocurrency, it tends to move with the price of oil. This explains why the rapid decline of oil prices towards the end of 2014 accomplished what the sanctions had been unable to do for many months before. Because the Russian Federation receives half of its revenue from oil and gas, it was particularly exposed to this decline. Russia is severely affected by the natural resource curse, depending on oil trading at $100 a barrel for a balanced budget.[1]
Taking a wider view of the Ruble crisis, low yields in Western nations due to quantitative easing and ZIRP have caused investors to make riskier investment choices, leading to a boom in risky Russian debt denominated in foreign currency, resulting in an increase of non-governmental foreign currency debt from $325 billion at the end of 2007 to $502 billion in June 2014.[2] When the Ruble fell, it became more costly for companies and individuals to service this extra debt in Dollars or Euros through their own revenues denominated in Rubles. This was very toxic for the Russian economy, and increased capital flight while discouraging future investment, aiding a weaker ruble and a lowering of Russia’s credit rating by both Moody’s and S&P to junk status.[3][4]
Russia’s central bank intervened to stop the crisis in its tracks. Russia began to use its nearly $400 billion dollar of foreign reserves to protect the Ruble. However, defending a petrocurrency is typically futile and opens the currency to speculators.[5] The central bank also imposed a steep interest rate hike from 10.5% to 17%, the largest increase since 1998. These protective measures only increased speculation and volatility, with the Ruble trading over 80 at one point, more than double its January 2014 high. In the short term, these measures were considered a massive failure. Over time, however, the protective measures seem to have worked to some extent, with the Ruble strengthening from its lows. In response, the central bank has lowered interest rates gradually during the first half of 2015. Whether or not the central bank was successful depends on how one defines success. If the measure of success is preventing a wholesale collapse of the Ruble and the economy, the Central Bank of Russia succeeded.
The Ruble crisis in Russia should also be viewed in the context of the emerging market slowdown and the concurrent end of BRIC. Russia was already near recession when the crisis had begun, Brazil had been floundering for years under Dilma Rousseff, China’s traditionally astronomical growth seemed poised to fall below 7% for the first time in many years. Additionally, Latin America is forecasted to grow .9% in 2015, the slowest of any major world region.[6] The emerging markets that had once led the charge on pulling the world out of the Great Recession are now beginning to be the deadweight. This accurately frames Russia’s situation going into the crisis, except with the additional burdens of foreign sanctions and a commodities bust.
The Ruble has strengthened significantly since its lows in December 2014. For now, the efforts of the Central Bank of Russia were largely successful when one considers the perilous situation of the country. The grand proclamations made by publications such as The Economist that Russia was “going over the edge”[7] have largely proven to be too short-sided or pontifical, especially given the frequency with which Russia faces crisis. In fact, Russia’s economy has generally performed better than expected, with positive GDP growth for 2014, and a smaller decline than expected in the first quarter of 2015. Despite the sanctions, despite the oil price decline, the Ruble has nonetheless stabilized and the economy is no longer teetering on the edge of an abyss. Russia no longer has to use foreign reserves or employ massive rate hikes to protect its currency. In March, Finance minister Anton Siluanov declared that the worst was over.[8] Although 2015 is projected to be a year of contraction, it is not as bad as originally anticipated. Projections of 2016 are divided between mild growth and contraction.
Regarding the Ruble crisis, many politicians and media outlets were far too presumptuous and categorical in their proclamations of Russia’s economic decline. After all, Russia has seldom gone a decade without a significant economic crisis, and yet their actions are always of consequence in the eyes of those same politicians and media outlets. The current crisis is ongoing and the ultimate outcome remains to be seen. Possibly the best outcome of this crisis for Russia is that it is a wakeup call about its natural resource curse, especially relevant now that the United States has replaced Russia as the world’s largest oil and gas producer.
[1] http://money.cnn.com/2014/10/28/news/economy/russia-oil-price-100-dollars-budget/
[2] http://www.wsj.com/articles/yield-seekers-prone-to-russias-disease-heard-on-the-street-1418767459
[3] in.reuters.com/article/2015/01/26/us-russia-rating-downgrade-idINKBN0KZ25920150126
[4] http://www.theguardian.com/world/2015/feb/21/russias-debt-downgraded-junk-moodys
[5] http://www.forbes.com/sites/francescoppola/2014/12/23/russian-ruble-let-it-fall-let-it-fall-let-it-fall/
[6] http://www.bloomberg.com/news/articles/2015-06-09/protesters-are-now-everywhere-in-latin-america-as-the-boom-fades
[7] http://www.economist.com/node/21636720
[8] http://www.bloomberg.com/news/articles/2015-03-25/with-hotline-to-kremlin-nabiullina-turns-from-ruble-to-economy
As Russian troops occupied Crimea, the fall of the Ruble began slowly, but gradually picked up pace until it began to look like a classic currency meltdown. The cause was a perfect storm of both steeply declining oil prices and the imposition of international sanctions on Russia. Although both factors played a role in the fall, the 50% decline in oil prices was particularly influential. Because the Ruble is a petrocurrency, it tends to move with the price of oil. This explains why the rapid decline of oil prices towards the end of 2014 accomplished what the sanctions had been unable to do for many months before. Because the Russian Federation receives half of its revenue from oil and gas, it was particularly exposed to this decline. Russia is severely affected by the natural resource curse, depending on oil trading at $100 a barrel for a balanced budget.[1]
Taking a wider view of the Ruble crisis, low yields in Western nations due to quantitative easing and ZIRP have caused investors to make riskier investment choices, leading to a boom in risky Russian debt denominated in foreign currency, resulting in an increase of non-governmental foreign currency debt from $325 billion at the end of 2007 to $502 billion in June 2014.[2] When the Ruble fell, it became more costly for companies and individuals to service this extra debt in Dollars or Euros through their own revenues denominated in Rubles. This was very toxic for the Russian economy, and increased capital flight while discouraging future investment, aiding a weaker ruble and a lowering of Russia’s credit rating by both Moody’s and S&P to junk status.[3][4]
Russia’s central bank intervened to stop the crisis in its tracks. Russia began to use its nearly $400 billion dollar of foreign reserves to protect the Ruble. However, defending a petrocurrency is typically futile and opens the currency to speculators.[5] The central bank also imposed a steep interest rate hike from 10.5% to 17%, the largest increase since 1998. These protective measures only increased speculation and volatility, with the Ruble trading over 80 at one point, more than double its January 2014 high. In the short term, these measures were considered a massive failure. Over time, however, the protective measures seem to have worked to some extent, with the Ruble strengthening from its lows. In response, the central bank has lowered interest rates gradually during the first half of 2015. Whether or not the central bank was successful depends on how one defines success. If the measure of success is preventing a wholesale collapse of the Ruble and the economy, the Central Bank of Russia succeeded.
The Ruble crisis in Russia should also be viewed in the context of the emerging market slowdown and the concurrent end of BRIC. Russia was already near recession when the crisis had begun, Brazil had been floundering for years under Dilma Rousseff, China’s traditionally astronomical growth seemed poised to fall below 7% for the first time in many years. Additionally, Latin America is forecasted to grow .9% in 2015, the slowest of any major world region.[6] The emerging markets that had once led the charge on pulling the world out of the Great Recession are now beginning to be the deadweight. This accurately frames Russia’s situation going into the crisis, except with the additional burdens of foreign sanctions and a commodities bust.
The Ruble has strengthened significantly since its lows in December 2014. For now, the efforts of the Central Bank of Russia were largely successful when one considers the perilous situation of the country. The grand proclamations made by publications such as The Economist that Russia was “going over the edge”[7] have largely proven to be too short-sided or pontifical, especially given the frequency with which Russia faces crisis. In fact, Russia’s economy has generally performed better than expected, with positive GDP growth for 2014, and a smaller decline than expected in the first quarter of 2015. Despite the sanctions, despite the oil price decline, the Ruble has nonetheless stabilized and the economy is no longer teetering on the edge of an abyss. Russia no longer has to use foreign reserves or employ massive rate hikes to protect its currency. In March, Finance minister Anton Siluanov declared that the worst was over.[8] Although 2015 is projected to be a year of contraction, it is not as bad as originally anticipated. Projections of 2016 are divided between mild growth and contraction.
Regarding the Ruble crisis, many politicians and media outlets were far too presumptuous and categorical in their proclamations of Russia’s economic decline. After all, Russia has seldom gone a decade without a significant economic crisis, and yet their actions are always of consequence in the eyes of those same politicians and media outlets. The current crisis is ongoing and the ultimate outcome remains to be seen. Possibly the best outcome of this crisis for Russia is that it is a wakeup call about its natural resource curse, especially relevant now that the United States has replaced Russia as the world’s largest oil and gas producer.
[1] http://money.cnn.com/2014/10/28/news/economy/russia-oil-price-100-dollars-budget/
[2] http://www.wsj.com/articles/yield-seekers-prone-to-russias-disease-heard-on-the-street-1418767459
[3] in.reuters.com/article/2015/01/26/us-russia-rating-downgrade-idINKBN0KZ25920150126
[4] http://www.theguardian.com/world/2015/feb/21/russias-debt-downgraded-junk-moodys
[5] http://www.forbes.com/sites/francescoppola/2014/12/23/russian-ruble-let-it-fall-let-it-fall-let-it-fall/
[6] http://www.bloomberg.com/news/articles/2015-06-09/protesters-are-now-everywhere-in-latin-america-as-the-boom-fades
[7] http://www.economist.com/node/21636720
[8] http://www.bloomberg.com/news/articles/2015-03-25/with-hotline-to-kremlin-nabiullina-turns-from-ruble-to-economy