The Decline of the Russian Ruble

Central Bank of Russia governor Elvira Nabiullina.

Central Bank of Russia governor Elvira Nabiullina.

Laya Mallela ’17

On Wednesday, October 9, the Russian ruble hit all-time lows of 44.74 against the euro-dollar basket and 40.13 against the dollar (USD). The ruble began sliding at the beginning of the year, but many believed it was overvalued against foreign hard currencies. However, as the year progressed, the currency continued to devalue due to falling oil prices and the crisis in the Ukraine.

The recent slump in oil prices has resulted in a quicker devaluation of the ruble. On Wednesday, Brent oil prices reached a low of $91 per barrel, the lowest since June 2012. Fears of a global over-supply and weak demand for oil have pushed oil prices down from a $115 high in June. In recent years, the Russian economy has become more dependent on oil to meet its budget commitments. Without oil revenue, Russia has run a budget deficit that hit 10.3% in 2013. The Russian government needs oil revenues to fill budget holes and the need continues to grow. Russia occupies a strong economic position when oil prices are high, but for every $1 decline in revenue Russia loses $2.1 billion in annual revenue. The slump in oil prices in recent months could see revenues decline by $30 to $40 billion. Russia will not immediately fall into economic crisis due to the recent dip in oil prices; however, if prices do not rebound to $105 per barrel, the budget will not balance. Since August, the ruble has fallen 9% against the dollar-euro basket and crude oil prices have fallen 8% demonstrating the ruble’s dependence on oil prices.

A secondary pressure on the ruble’s decline is the sanctions resulting from the Ukrainian Crisis. While the sanctions do not exert as much pressure as crude oil prices, they still weaken the ruble. The sanctions, which added Sberbank to the list of banks excluded from Western debt markets and cut the accessible debt limit, imposed in early September severely squeezed liquidity in the Moscow FX Interbank market. These actions resulted in an increase in the cost of borrowing and added pressure on the ruble. The sanctions imposed earlier this year shut out other major Russian banks and firms out of international capital markets have rapidly increased the demand for overseas currency than many large Russian firms need in order to meet external debt obligations. Lastly, the recent uptick in the fighting in eastern Ukraine, where separatist fighters are battling to dislodge Ukrainian troops may result in new sanctions.

The Central Bank of Russia’s response to the decline of the ruble has been to move the trading band upwards of 5 kopecks (hundredths of a ruble), once it exhausts a $350 million intervention allotment. In order to control the fall, the central bank begins selling dollars and euros to cushion the currency’s decline. The ruble’s recent trading levels mean the central bank has shifted the band seven times since the beginning of the month, spending at least $2.45 billion to slow the ruble’s drop. Currently, the trading band stands at 35.75-44.75 against the euro-dollar basket. In late September, the central bank had reserves of $457 billion, the fourth largest in the world.

However, with slumping oil prices and possible increases sanctions, the ruble will likely continue to decline. The head of the central bank, Elivra Nabiullina, has admitted that if currency markets continue to turn against the ruble, the bank “will be unable to restrain them.”  The central bank spent $6 billion of Russia’s foreign exchange reserves to prop up the value of ruble, but it continued to slide against the dollar. With oil prices continuing to decrease, the ruble will continue to decline and the central bank will have to dip further into its reserves to prop up the value of the ruble. Therefore, Ms. Nabiullina stresses that the central bank will not quit the foreign exchange, but will change the nature of participation. The bank will intervene if there are risks of financial stability. The central bank may have to decrease its purchases of rubles, which will further hurt the currency’s value.



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