The Russian Ruble Touches New Lows
The collapse in oil prices has crushed the Russian ruble, pushing the country to the verge of economic collapse.
The RUBUSD exchange rate is such that a dollar costs 78 rubles. The fact that in May 2015—the period of highest value for the ruble in 2015—a dollar cost just over 48 rubles shows just how much the Russian currency has fallen in less than a year. In August 2008, a dollar cost just 23 rubles.
The Russian currency has lost up to five percent against the dollar; hints from the ECB that it would intensify its quantitative easing (QE) policy and its effect in fueling oil prices generated some support for the Russian ruble, but it was too little too late, with special emphasis on the tardiness.
The Russian central bank has summoned all major banks of the country for an “emergency meeting” on the currency. Elvira Nabiullina, head of the central bank, has canceled her visit to Davos and several Russian media reports have identified a correlation between the two episodes. (Source: “Russian ruble hits record low against dollar, central bank convenes meeting,” Channel News Asia, January 22, 2016.)
Low Oil Prices Have Crushed the Ruble
The Kremlin has tried to minimize the damage. The Russian ruble is not collapsing, as President Vladimir Putin’s representative Dmitri Peskov argued; market volatility was more to blame: “I wouldn’t use the word ‘collapse.’ The rate is really changing, the rate is volatile, but it’s far from a collapse.” (Source: “The Russian Ruble has hit a new low against the dollar as oil prices continue to slide,” USNews, January 21, 2016.)
Nabiullina said that the ruble is heading towards its fundamental levels, which do not require intervention, unless risks to financial stability ensue. (Source: “Russian ruble hits record low against dollar, central bank convenes meeting,” Channel News Asia, January 22, 2016.)
However, her statements have only helped accelerate sales of the ruble, prompting an emergency meeting of the central bank.
The problem is that regardless of interventions, the main cause of the ruble’s decline is the oil price and no amount of interventions can reverse the downtrend. The population is starting to panic and it may force the bank to take drastic action.
The ever more precarious state of the Russian banking system is not helping either. On January 21, the Russian central bank revoked Vneshprombank’s license in what promises to be one of the biggest banking collapses in Russian history. (Source: “Russian central bank revokes licence of Vneshprombank,” Reuters, January 21, 2016.)
The decision follows the identification of 187 billion rubles (US$2.3 billion) missing from its budget. The central bank had already intervened to place Vneshprombank under special administration on December 18 over concerns about its financial position and infringement of the minimum capital requirements. Vneshprombank is the 34th Russian bank by assets and 33rd by deposits. Its clients include members of the political elite and the Russian financial sphere, as well as the Orthodox Church.
Sanctions and Banking Crisis Hitting Economy
In 2015, gross domestic product (GDP) fell by 3.7%, according to initial estimates. (Source: “Russia’s GDP falls 3.7% as sanctions and low oil price take effect,” The Guardian, January 25, 2016.)
This year, Sberbank warns that it could slip by further if the price of oil stays at current levels—its yearly high has been closer to $32.00 per barrel and has gone down as far as $27.00 per barrel. Not only that, but inflation continues to run at two figures because imported goods are becoming increasingly expensive following the devaluation of the Russian ruble.
The result is that daily life has become more difficult for the average Russian. This is a disaster for Russia, which calculated its 2016 budget based on $50.00-per-barrel oil price. It would have to revise its public accounts with heavy cuts.
Unless oil prices rise as part of a steady recovery, Moscow’s stock market will suffer and the ruble with it, approaching the lowest levels in its history. The RTS Index in Moscow, denominated in dollars, fell 3.5% early in the session on January 26, accumulating a loss of almost nine percent compared to the beginning of the year. Oil accounts for more than half of Russia’s state revenue, along with gas. There is no respite for the ruble in the near future.
Having recorded 3.7% lower GDP over the past year, Russia will not remember 2015 kindly, as it looks to the immediate future with anxiety. By all accounts, 2016 could be more merciless, bringing with it a second consecutive period of recession.
Russia Has Few Options to Support Ruble
The International Monetary Fund (IMF) warns, “Russia, which continues to adjust to low oil prices and Western sanctions, is expected to remain in recession in 2016. Other economies of the Commonwealth of Independent States are caught in the slipstream of Russia’s recession and geopolitical tensions. In some cases, affected by domestic structural weaknesses and low oil prices. They are projected to expand only modestly in 2016 but gather speed in 2017.” (Source: “IMF cuts Russia’s 2016 GDP growth forecast to contraction of 1%,” Econotimes, January 26, 2016.)
Prime Minister Dmitry Medvedev has already announced that within a week, he would introduce a new anti-crisis plan that would take the trend in oil prices into account. In 2015, unemployment in Russia rose by 7.4% to 5.8% of the working population. For those still lucky enough to be included in the ranks of the employed, real wages have contracted nine percent (in the first 11 months of last year) accompanied by record inflation estimated at 12.9% in 2015.
This leaves the central bank few tools to reverse the ruble’s downtrend. Russians have taken to criticizing Vladimir Putin now, whom they accuse of not doing enough during his 15 years in power to diversify the economy and make it less dependent on oil, gas, and minerals.