Explainer: Here’s everything you need to know about the Russian ruble – why it has depreciated in value by 84 percent this year, what factors influence the dollar-ruble exchange rate, and what has been the impact of the falling ruble on the Russian domestic economy.
People walk past a display with exchange rates in downtown Moscow, November 2014. Photo: AP
UPDATED: The article was updated on December 16, 2014 to include recent exchange rates of the U.S. dollar and euro against the Russian ruble, the change in percentage of the ruble's value since the beginning of the year, new chart with the USD/RUB exchange rate on the Moscow Exchange, and the price of Brent crude oil.
Confused by what’s happening with the Russian ruble? In the following eight questions, we highlight answers to some of the most common questions about the fate of the Russian ruble.
What’s happening with the Russian ruble?
Considering official data from the Central Bank of Russia, since the beginning of the year, the ruble has depreciated by 84 percent against the U.S. dollar and by nearly 67 percent against the euro. As can be seen from the graph, the major drop in the ruble’s value started in July 2014.Source: Central Bank of Russia
However, on the Moscow Exchange (MoEx), the U.S. dollar and euro were trading at higher prices. According to MoEx, since the beginning of the year, the ruble has depreciated by 117 percent against the U.S. dollar.Source: Moscow Exchange, https://moex.com
How is the official Russian ruble exchange rate formed?
The Central Bank of Russia establishes the official Russian ruble exchange rate on a daily basis. The Bank issues an order that comes into force the next calendar day, thereby setting up the exchange rates of foreign currencies.
The official exchange rate of the Russian ruble against the U.S. dollar is calculated and set up by the Central Bank of Russia based on the price of the ruble against the dollar during daily trading on the interbank domestic currency market.
Exchange rates of other foreign currencies are based on the official exchange rate of the U.S. dollar against the ruble and the quotes of those currencies against the U.S. dollar on the international currency markets and interbank domestic currency market as well as on the exchange rates of the U.S. dollar set up by the national banks of relevant states.
Why has the ruble depreciated so much this year?
There are several major factors that have weakened the Russian ruble: slow economic growth in Russia, a decrease in the positive balance of payments, capital outflow, the drop in oil prices and the lack of foreign investment. In addition to that, Western financial sanctions affected the Russian economy by depriving businesses of vital Western financial sources desperately needed to refinance business debts.
According to Sberbank CIB, the corporate and investment banking business of Russia's state-owned Sberbank, Russian debtors have to transfer $29 billion abroad in the final quarter of this year and $106 billion in 2015, of which $58 billion is presently lacking. Even if these debtors are able to pay their debts they will not get further financing, which means that their economic activity will slow.
The Russian economy had already been experiencing a slowdown of its growth rate since 2012.Source: Federal Statistic Service of Russia
Balance of payments
The balance of payments of the Russian Federation has also been decreasing since 2011.
Throughout 2014, the balance of payments has been decreasing – $26.8 billion in the first quarter, $14.1 billion in the second quarter, and $11.4 billion in the third quarter.
Since the beginning of 2014, the capital outflow from Russia has reached record numbers. In the first three quarters of the year, it has already exceeded $85 billion. Mostly it happened due to the conflict in Ukraine and the resulting Western sanctions. One of the main results of capital outflow is an increased demand for foreign currency, in this case, U.S. dollars and euros.Source: Central Bank of Russia
Drop in oil prices
The Russian economy heavily relies on oil exports, which makes it very sensitive to any fluctuation of world oil prices, especially if it is unpredicted and abrupt. In 2013, crude oil exports comprised 33 percent of total export revenues.
Oil prices started to drop in June 2014 and by December 16, 2014 a barrel of Brent crude traded under $70. The ruble responded immediately to that decline and since June-July, has started to depreciate. For December 17, 2014 the U.S. dollar official exchange rate against the ruble was set up at 61.15 rubles by the Central Bank of Russia. Therefore, since the beginning of the year, the Russian ruble has lost 84 percent of its value.Source: Central Bank of Russia, Bloomberg
As can be seen from the graph, the ruble started to weaken rapidly after world oil prices began to decline.
Does the Central Bank of Russia affect the ruble exchange rate?
Yes, it does. However, to a lesser extent than it did before Nov. 10, 2014, when the Central Bank of Russia let the ruble float freely.
Previously, before Nov. 10, 2014, the Central Bank of Russia influenced the ruble exchange rate if it changed abruptly. When the ruble abruptly depreciated or appreciated, the Central Bank of Russia made currency interventions to stabilize the exchange rate.If the ruble depreciated, the Central Bank of Russia bought rubles (sold dollars and euros); if the ruble appreciated, it sold rubles (bought dollars and euros).
It is also important that the ruble exchange rate was connected not only to the U.S. dollar but also to the dollar-euro basket, which is €0.45 and $0.55 since 2007. So, when the ruble value of the dual currency basket reaches the top or bottom boundary of the floating band, the Central Bank of Russia will carry out transactions on the sale (or purchase) of foreign currency at volumes equivalent to $350 million per day.
Since the beginning of 2014, the ruble has been constantly depreciating and the Bank of Russia has been using currency interventions, spending $90 billion of its gold and foreign currency reserves to manage the currency’s slide.
However, on Nov. 10, 2014, the Central Bank abolished its policy of letting the Russian currency move within a certain band relative to a dollar-euro basket and of intervening when the boundaries were crossed. Therefore, the Central Bank of Russia essentially allowed the ruble to float freely. Nonetheless, the Russian Central Bank kept the right to intervene in case of a threat to financial stability.
One of the main reasons why the ruble was allowed to float freely is to protect the ruble from speculative attacks. With a free floating ruble, it becomes much harder for bankers to earn on the exchange rate differences, because when the currency is held within a certain band and the Central Bank intervenes in the known particular circumstances, it is easy to predict the exchange rate and, hence, to earn on the differences in the exchange rate.
Now, when the Central Bank of Russia let the ruble float freely, its exchange rate mostly depends on fundamental economic factors. However, the Bank can intervene unexpectedly in order to punish speculators by increasing/decreasing the ruble abruptly. Therefore the strategy the Bank of Russia is using will deter speculators because attacking a free-floating currency is risky and costly.
How did the ruble depreciation affect Russian citizens? What has been the reaction of Russian citizens?
On one hand, a cheap ruble is bad. Assuming that a salary (in rubles) stays the same, purchasing power decreases, as people can buy fewer goods whose prices are defined by the world market. The price of domestic products rises as well because it is enough to have imported competing products in the market.
Also it is important to remember: when the price of a particular product increases, a person purchases fewer amounts of other goods, because he or she has less money left. Therefore, almost everyone suffers from the ruble depreciation, but most of all those who are poorer.
However, the middle class suffers as well, because during the last decade, people started to consume more imported goods, which became a part of daily life, people started to travel abroad and spend dollars. Thus, for them it is harder now to maintain their “lifestyle.” If a person consumes more imported goods and spends money abroad, then his or her purchasing power decreased by up to 84 percent as the ruble lost 84 percent of its value against the U.S. dollar since the beginning of the year.
A weak ruble also causes greater price inflation. However, it is hard to make a precise estimation because everyone holds a different market basket of goods and inflation can be different for different regions of Russia.
Nevertheless, there is a consumer price index that is based on the special market basket designed by the Federal State Statistic Service (FSSS). According to the FSSS, the consumer price index for October 2014 is 8.3 percent higher than in October 2013, which is much higher than the planned level.
Prominent Russian economist Sergei Guriev estimates that in December, the index will be about 9 percent higher than last year. That means that prices on average have already increased by more than 8 percent. The estimate of inflation for the coming year, considering current conditions, is about 8 percent, which means that the real income of Russian citizens will drop by more than 15 percent. Thus, everyone is affected by the weak ruble and the higher inflation rate.
On the other hand, a weak ruble also has positive implications. Russian businesses, especially those which are export-oriented, started to receive more money for their goods as they pay salaries and taxes in rubles, but their income is in dollars or euros. Every dollar of revenue now buys more rubles with which salaries and taxes are paid.
How does the ruble depreciation affect the Russian economy?
In the current situation, the weak ruble is also good for Russia’s budget, as a major part of it is formed from the export revenues that mostly consist of fuel-energy products that are traded in U.S. dollars. In 2013, crude oil, oil products and gas (including LNG) comprised 67 percent of total export revenues. As of September 2014, it was 68 percent of all export revenues.
So, if at the beginning of the year, a barrel of crude oil was $107 and the U.S. dollar was trading at 33.2 rubles, the budget received 3,552 rubles. Now (December 17, 2014), with a price of $59.07 per barrel of Brent crude oil and the U.S. dollar trading at above 60 rubles (on the Moscow exchange), the budget receives more than 3,750 rubles. Thus, a weak ruble with decreasing oil prices is to the advantage of the Russian government, which will be able to fill the budget with necessary funds and to keep its social commitments.
On the other hand, a weak ruble causes greater inflation. The planned inflation rate for 2014 was about 6 percent. Russian Minister of Economic Development Alexey Ulyukaev said that by the end of this year inflation would be about 9 percent, and by the beginning of 2015, about 10 percent. This means that the purchasing power of an average citizen dropped by about 9 percent.
In order to keep people feeling comfortable, the Russian government should adjust people’s salaries and pensions according to the index, which means to increase them by 9 percent. This will be a burden for the state budget.
If the Russian government decides to increase salaries and pensions accordingly, it can take money from the Reserve Fund, an account that currently stands at $88.94 billion (or 6.1 percent of Russia’s GDP as of Dec.1, 2014). By the estimates of economists, including Sergei Guriev, those funds will dry out in three years if the current situation will not worsen.
After that, the Russian government will have to decrease budget expenses by cutting pensions, social commitments, the military budget or some other expenses.
Do Russians worry about the weakening of the ruble?
At the end of October, Levada Analytical Center conducted a survey that showed that 52 percent of Russians are not worried about the weakening of the ruble. In rural areas, this issue does not bother 68 percent of Russians. According to the results of this survey, only 45 percent of those polled are concerned with the increased USD-RUB exchange rate. Moreover, even among those who are concerned, the majority worries mostly about the increase of consumer prices.
How long will the ruble decline last?
It is very difficult to predict for how long the ruble will continue to fall or if it will gain some value back. Russian Finance Minister Anton Siluanov stated on Nov. 24 that it is impossible to predict how much the ruble will cost in the future. “Watch the oil prices. The ruble will follow their behavior,” said Siluanov.
As the ruble is highly dependent on world oil prices, it will stop losing its value if the oil prices stabilize. This scenario is very likely, because winter is coming and demand for oil increases.
Oil prices below $80 per barrel are not comfortable for the oil producing countries. That is why it is expected that during the upcoming Organization of the Petroleum Exporting Countries (OPEC, supplier of about 40 percent of the world’s oil) meeting, which is planned to happen on Nov. 27 in Vienna, country-members might negotiate the decrease of the oil production to shore up oil prices or, at least, to stabilize them.
However, Saudi Arabia, the world's biggest oil exporter, has yet to say whether it supports such a move or not. So far it was committed to seeking a stable oil price, as well as steps to prevent market speculation over this price.
Also, geopolitical circumstances, namely the Ukrainian crisis, affect the strength of the ruble directly influencing the investment climate in Russia and, hence, capital outflow. As the winter approaches and Ukraine needs gas and coal to survive the winter, escalation in the southeast is unlikely, as well as new sanctions against Russia. This also lowers the expectation of a further ruble depreciation.
However, it is also unlikely that the ruble will bounce back significantly as the capital outflow from Russia increases. Russia’s Finance Minister confirmed the forecast of the capital outflow: $130 billion by the end of the year.
On Nov. 24, Minister of Economic Development of the Russian Federation Alexey Ulyukaev highlighted that the ruble had already bounced back by about 7 percent (on Nov. 24, the U.S. dollar traded at 44.8 rubles). He argued further that the ruble did not reach its equilibrium point yet and assessed it at about 41-43 rubles for 1 U.S. dollar. Thus, he expects strengthening of the ruble further.
On the other hand, former Finance Minister Alexei Kudrin argues that the ruble has already absorbed the effects of Western sanctions against Russia, the slowing of the national economy and the decline in the price of oil. ”These factors are by and large are already priced in. The ruble has found its equilibrium,” he said.
Another factor, the fiscal period, affects the ruble, however, on a short-term basis. Demand for the ruble increases because in Russia companies should pay taxes in rubles at the end of November.
Also it is worth remembering that a relatively weak ruble is good for the budget and exporters and the Russian government will not strive to return the ruble to its value in January 2014.