Russian Ruble Crisis Deepens With Falling Oil Prices

russian ruble

The Russian ruble has been dragged to a month low with tumbling oil prices. The price of Brent, the international benchmark of oil, has declined to $47 a barrel, and touched the six-year low. It is down around 60% from $115 in June 2014. This is pulling down the ruble. The ruble plunged 46 percent against the dollar last year. It has extended its slide this year to 7.2 percent.

The ruble slide continues and the currency is now trading at 66 against the U.S. dollar, the lowest since Dec. 17. The yield on five-year ruble-denominated bonds rose to 17.64 percent. The five-year sovereign bond yield increased 223 basis points in 2015, on top of 819 basis points increase last year.

Since last year the ruble has been badly hit by falling oil prices and Western sanctions over Russia’s role in the Crimea and Ukraine. In mid-December the central bank raised its interest rate drastically to 17 percent from 10.5 percent to arrest the ruble decline, but its efforts failed. The ruble collapsed to a record low of 80 on December 16; though it recovered to 60 within a few days.

Russia’s central bank took other measures to deal with this crisis. It intervened in currency market, by selling its dollar reserves worth $80 billion to buy rubles trying to shore up the ruble. Its foreign currency reserves have dropped below $400 billion, lowest level in 5-1/2 years. The central bank has asked the exporters to convert their dollar earnings into ruble. It has also extended dollar and euro loans to banks to provide foreign currencies credits to companies.

The Russian economy, the second-largest crude exporter, is largely dependent on oil prices. Oil revenues make up 45 percent of the government budget. As the Rouble is heavily affected by the price of oil, the sharp fall on prices has been disastrous for Russia. This is leading to panic and a rise in inflation. Last week the rating agency Fitch has downgraded its sovereign rating.

Russia is moving towards deep recession. Russia’s GDP might shrink by a 4.5 percent in 2015, even if the average price of crude oil hangs around $60 a barrel in 2015.

kanchanThe author, Kanchan Kumar, is an MBA in Finance and MS in Statistics and has served as Executive Director and Advisor with several multinational companies, Financial Institutions and Universities.  He writes on Global Economy, Market and Personal Finance.

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