Russia: Ruble suffers major hit in August, weak Russian currency is here to stay
September 7, 2015
The Russian ruble hit a historic low in late August following over a year of volatility. The value of the ruble first began to fall in early 2014 after several years of an exchange rate of roughly 30 RUB per USD, as the country was acutely affected by weak economic growth, high geopolitical risks following the annexation of Crimea and the outbreak of war in Ukraine. However, it was with the collapse of oil prices at the end of 2014 when the ruble’s value could not defy gravity and thus began its free fall against the U.S. dollar, with the currency bottoming out at 68.5 RUB per USD on 16 December.
The beginning of 2015 saw strong volatility in the foreign exchange market, but the Russian currency stabilized within a corridor of 50 to 60 RUB per USD at the end of the first half of this year. There was another episode of strong volatility at the outset of second half of the year and, on 24 August, the Russian currency closed the trading day at 70.9 RUB per USD, which was even lower than the aforementioned low point of the December 2014 ruble crash and represented a new all-time low. The sharp drop in August was primarily a response to falling oil prices and rising fears regarding the effects that the shockwave caused by China’s stock-market crash could have on the global economy. Although the ruble has recovered some of the ground lost in recent days, the currency is still significantly weaker than the 50 to 60 RUB per USD corridor observed in previous months.
The renewed weakening of the ruble will likely put further pressure on banks and push up inflation, which is not welcome news to Russian monetary policy makers. Consequently, a delay in further interest rate cuts in the coming months is on the cards. Moreover, Russia’s Central Bank recently announced that it had adopted a fully-floating exchange rate regime, although suspicion persists that the Bank is informally intervening in the exchange rate market to support the ruble.
The fall in oil prices has not been declared over, and prices are expected to remain low for the rest of the year. Fluctuations of the Russian ruble are largely driven by the price of oil, which along with gas, is Russia’s main commodity export. Should the price of oil remain low throughout the remainder of 2015, a weak Russian ruble is here to stay.
Author: Ricardo Aceves, Senior Economist