Six years ago an economic crisis broke out in Russia, from which the country has not recovered so far. It was caused by the so-called "oil shock" - the collapse of oil prices. This was followed by the ruble devaluation. If before the crisis, an average of 35 rubles was given for one dollar and 47-48 rubles for one euro, the ruble depreciated almost twice later in just a few months.
What led to the fall in oil prices and the Russian economy collapse? And how it affected the ruble prices? In this article, we will talk about the main reasons and consequences of those events.
What Caused The Russian Financial Crisis?
Analyzing the Russian economy collapse and what exactly triggered such a devaluation of rubble and following the crisis, there is a couple of main drivers here: sanctions and oil. Of course, we can also add here the investors` lack of confidence that made them sell off their Russian assets, but it more like a consequence, not a reason.
The Russian Economy Oil Crash
Back in January-August 2014, the average price of Brent oil was $107.75 per barrel. The peak was recorded on June 19 - $115.19. The situation changed abruptly in October: a sharp fall in prices began, by mid-January, the price was already slightly over $45. Record low this indicator reached a year later - January 21, 2016 barrel of oil was worth 27.5 dollars.
Experts attribute the drop in oil prices to several factors. The first of them is the increase in oil production. In particular, thanks to the hydraulic fracturing technology, the USA and Canada increased their exports of shale oil.
Another factor of the price decrease is connected with the main importer of hydrocarbons - China. Five years ago, the Chinese economy slowed down. China has been creating large reserves for a long time, and at some point, the factor of the rapid increase in China's imports - both for consumption and as reserves - has disappeared.
Against the same backdrop, the oil countries began to compete with each other and bring down prices in order to increase exports and maintain revenues. First of all, it was Saudi Arabia and the United States. Competition between exporters was a factor in the catastrophic fall in prices.
The biggest drop in oil prices occurred in early 2016. Just at that moment Iran, a country with the fourth-largest oil reserves, returned to the world market after the sanctions were lifted.
By the end of the same year, oil prices had stabilized more or less. The main role in this was played by the agreement on oil production limitation, which was signed by the OPEC states, as well as by 11 non-member countries, including Russia, Mexico, Azerbaijan, Malaysia, Sudan.
The Russian Economy International Sanctions
After the Crimea’s accession to the Russian Federation in March 2014, the US, the European Union (EU) and a number of their allies launched a set of sanctions on Russia and its political leadership trying to change Russian foreign policy in terms of Ukraine. In the financial sphere, those sanctions limited the major Russian state-owned banks’ and companies’ access to the international financial markets, minimizing in such a way the possibility of refinancing their foreign debt in the Western commercial money markets. Following foreign debt repayments, in combination with capital outflows, created a solid long-term factor that could weaken the rouble’s value. The sanctions have been a true demonstration of monetary diplomacy.
However, the 2014 sanctions were relatively moderate. Russia was not cut from the international SWIFT payment system, and foreign investors were not restrained from investing in Russian internal sovereign debt bonds. Nor was an oil embargo introduced on trading with Russia. By closing Russia off the Western financial markets, the US and the EU let Russia’s leadership impose counter-sanctions, principally through an embargo on food imports, in summer 2014. Therefore, these counter-sanctions improved Russia’s ability to avert adjustment costs to its trading associates, mainly within the EU. Despite the bombast of Russian and Western political heads, the sanctions had rather a long-term consequence. Although in a short time lag of six months, a reorganization of the country’s cross-border financial and trade flows, required by a new sanctions regime, qualified Russia to launch a balance-of-payments adjustment before a second, more severe, shock hit the Russian financial system in autumn and winter 2014.
Russian Economy US Dollar Reliance
As we all know, the Russian Federation is profoundly dependent on trading oil, gas, and coal and all these transactions are processed with the US Dollar following the Bretton Woods Conference. And the Kremlin, in an attempt to react to sanctions, trying to convince the allies to abandon using dollars and switch to some alternative currency, which has very low chances of success.
Of course, expanded trade with Asian partners recently has contributed to the reduction of the general supplement of the dollar to its currency contracts, but the dollar inflow settlements still made a lion's share.
It should be noted that the production of oil and gas was and always will be a cornerstone of the country’s economy — with 50 percent of the federal budget. While gas is sold to EU countries on long-term agreements that could be paid in euros. Oil, on the other hand, is being traded on the global market, and other participants are unlikely to take risks working with any other currency but USD. Maybe China would follow Russia`s de-dollarisation with its increase in buying gas and oil, others won`t join that "riot".
Additionally, Russia is striving to reduce its dependence on the USD by reducing US securities holdings but the situation here is very interesting. Let`s appeal to figures so the picture will be clear. In April 2018, as a result of tough sanctions, Russian investments in U.S. Treasuries were cut dramatically – from $96.1 billion to $48.7 billion. One month later, this figure was reduced again, to $14.9 billion. Later in 2015, Russian investments in U.S. Treasuries topped $150 billion.
Siluanov, First Deputy Prime Minister, when he was asked if Russia could move away from selling oil for dollars, said that such a move was not impossible. Here is a cite: “Although oil is usually traded and contractual payments settled in dollars, we can set a dollar equivalent but accept payments for our goods in euro or currencies and even our national currency.”
As per financial analysts and economists, if there was an alternative to the Dollar then it would have already been implemented after 2009. Russia can claim doing so but the fact is there is no alternative.
The Russian Economy Collapse And Fall Of The Ruble
In December 2014, Russia experienced the sharpest fall of its national currency since the August 1998 financial crisis. As already noted, a sharp drop in oil prices, concerns of foreign investors and Western sanctions contributed to the fall of the Russian ruble.
At the end of 2014, the ruble depreciated against the dollar by 72.2% (from RUB 32.66 as of 1 January 2014 to RUB 56.24 as of 1 January 2015) and against the euro by 51.7% (from RUB 45.06 to RUB 68.37).
In the first half of the year, the ruble was under pressure from the riots and the subsequent coup d'etat in Ukraine, and then from the sanctions imposed on Russia by the USA and other countries. Since autumn, the main role in the Russian economy collapse was played by the reduction of oil prices: from $107 per barrel of Brent oil in August 2014 to $60 in December.
On November 28, after the refusal of the Organization of the Petroleum Exporting Countries (OPEC) to reduce oil production, the euro rose to 61.41 rubles. On December 2, the dollar became more expensive than 50 rubles. On December 16, after the Central Bank decided to increase the key rate from 10.5% to 17% per annum, an absolute record was set; more than 80 rubles per dollar and 100 rubles per euro.
In 2015, the main fluctuations of the ruble exchange rate against the dollar and euro were due to changes in oil prices. In total, at year-end, the Russian currency depreciated against the dollar by 29.7% (from RUB 56.24 to RUB 72.93), against the euro - by 16.5% (from RUB 68.37 to RUB 79.64).The largest fall occurred on January 12, the first day after the New Year holidays. Due to the continuing fall in oil prices on the world market, the Central Bank recorded the dollar rate at 62.73 on January 13. (11.53% growth), euro - 74.35. (growth of 8.74%).
The largest daily falls of the official ruble exchange rate against the dollar were recorded on February 6 (by 4.83%; 3.16) and April 22 (by 4.76%; 2.45). As for the euro, the ruble has become cheaper the most on August 25 (by 5.85%; 4.48) and June 5 (by 4.79%; 2.83).
At the end of 2016, the ruble was able to strengthen against the dollar and the euro due to the stabilization of oil quotes. The growth against the dollar amounted to 16.9% (from RUB 72.93 to RUB 60.66), against the euro - 19.9% (from RUB 79.64 to RUB 63.81).
The biggest decline in the ruble exchange rate in 2016 against the dollar was recorded on January 21, when the Central Bank of Russia lowered the Russian currency rate by 4.04 the next day - to 83.59 per dollar (a day decline of 5.2%).
The biggest fall of the ruble against the euro was recorded due to another sharp decline in oil prices on January 26. The RF Central Bank lowered the rate the next day by 4.73 to 88.89 per unit of the European currency (a 5.61% drop).
At the end of 2017, the dollar rate fell by 3.83% (from RUB 60.66 to RUB 57.6), while the euro rose by 6.9% (from RUB 63.81 to RUB 68.21).
The biggest fall in the ruble exchange rate in 2017 against the dollar was recorded on June 21, when the Central Bank of Russia lowered the Russian currency by 1.42 - to 60 rubles per dollar (daily decline by 2.43%).
The biggest fall of the ruble against the euro occurred on June 28. Then, the Central Bank of Russia lowered the rate by 1.73 - to 67.69 rubles per unit of the European currency (a 2.41% decline).
The decline in the official exchange rate for April 11th was the largest in 2018, and the sharpest since January 2015. The ruble fell by 9.33% against the dollar and 12.67% against the euro since the beginning of the year (by 5.32 and 8.64, respectively).
Has the Russian economy collapse been managed? Experts agree that the country has not yet returned to pre-crisis indicators. Russian GDP has not yet reached the level of 2013, household incomes are much lower than in 2013 and they continue to fall, the level of investment is lower than in 2013.
Besides, according to experts, in six years after the Russian Financial Crisis, there wasn't anything created that would help move the economy forward. The economy is made up of small pieces: new chemical production, new machine building, improved industry, developed logistics. All that has been done are some fragments of heavily underfunded national projects.
A teacher from the Higher School of Economics looks a little more optimistic about what is happening in the country. "Russia has a positive growth rate, a small plus was in 2017, 2018, and 2019. It was small - around 1.5-2%, growing three years slower than the rest of the world: the overall growth rate is around 3%," says the analyst, adding that the Russian Financial Crisis as such has long been gone.
According to the expert, the Ministry of Finance has adapted to life at current oil prices. "The Ministry of Finance takes taxes from oil workers in rubles, so the higher the price of oil in rubles, the higher the budget revenues. Thanks to this, Russia has been living for the last three years within the Maastricht norms, we have a budget deficit of less than 3%, we have almost no external debt, it is 15% less than GDP - it is less than that of France, Belgium, and Italy".
Forex traders should be wondering what is going to happen to the USD/RUB rate and how the country (if) will recover from the Russian Financial Crisis. Keep reading to find out.
Russian Economy News & The Ruble in 2020
The Russian economy faced a combination of rare external shocks at the beginning of the year, such as oil price war and coronavirus outbreak, which jointly produced a crisis.
On the global scale, we see that most countries, including the U.S., followed a simple strategy to tackle the coronavirus problem, which suggests a more negative impact of national shocks on the economy immediately in the second quarter of 2020. The situation in Russia is different, as the government of the country decided to smooth out the negative economic effect of COVID-19 in the second quarter of the year. In fact, Russia has become one of the world's top virus hotspots, with more than 0.641 million confirmed cases. It also incurred higher costs only to prevent more cases, due to the large-scale use of military forces to deploy field hospitals and support civilian medical personnel.
Problems with the coronavirus were accompanied by a new spiral of oil war between Russia and Saudi Arabia. It has longer-term consequences for both countries. Both have tried to get even with each other in an acute coronavirus outbreak. In this conflict, Russia was able to repel the Saudi attack and return crude oil prices to more or less acceptable levels of $40. However, this is not enough to compensate for the increase in budget expenditures after 2 months of national lockdown, because the OPEC+ deal, signed in April 2020, requires Russia to cut production by 20 percent. When the agreement was reached, oil prices began to recover, but because of the production cuts, Russia will receive lower budget revenues. It cannot be said at once that this deal was a clear victory or defeat for Russia, but it still managed to bring some relief to Russian oil and gas companies. Commodity exporters play a more important role in its economy than other countries because they provide a huge part of financially profitable jobs.
Indeed, the situation in the third quarter could be even worse for the country's economy if the second wave of coronavirus comes. In the case of a new lockdown, the Russian ruble will be sent into a free fall just like it was in 2014.
As for the current situation (at the moment of writing), analysts say that they expect that the Russian stock market will face external pressure due to the renewed growth of COVID-19 disease in the U.S. and the introduction of quarantine measures there. This increases uncertainty about demand and growth prospects; oil price is going down - Brent fell by 1.3% to $40.46 per barrel.
If we look at other similar Russian economy collapses, we can conclude that the current coronavirus crisis is almost identical in its consequences for the Russian economy. Hence, this country must be included in the list of countries to keep an eye on.
In 2008-2009, we saw a rapid growth of the US dollar against the ruble, and the same situation occurred in 2014. Now, after an impressive growth in March 2020 and a modest rebound after that, we can expect the weakness of the ruble to continue.
The situation in the economy is very similar to the Russian Financial Crisis of 2014, and in October the USD/RUB rate soars to 80-90 levels. EUR/RUB may follow a similar trajectory, challenging the psychologically important level of 100 rubles by the end of Q3 2020.
Trading the Russian Ruble
If you want to know how to trade the Russian ruble properly, you should consider both fundamental and fundamental sides.
The Fundamental Picture
The coronavirus outbreak began to hit Russia after Western European states and the United States, but could ultimately destroy the country's already dubious economic resistance. It is not yet reasonable to surely estimate the expected losses of the Russian economy, but forecasts range from almost zero annual GDP growth to an optimal scenario of 0.5%. Some Russian economists are afraid that the overall economy may shrink by 9 percent by the end of 2020.
The impact of the crisis on Russia is not only economic. The outbreak of the COVID-19 and the government's response to it could demonstrate Russia's readiness and the effectiveness of its political system. Instead, it could demonstrate that senior management has not been prepared for challenges of this kind and scale.
Russia's economy and influence were hampered not only by the outbreak of the pandemic but also by the war on oil prices with Saudi Arabia that heralded it. Putin made Russia the principal participant in global energy policy with the partial aim of driving a wedge between Washington and its most important ally in Riyadh. Just before the pandemic, Moscow denied meeting Saudi Arabia's demand for a doubling of production, leading to a price war with the kingdom that was associated with an exponential increase in oil production and a decline in global demand. Eventually, the Russian leadership agreed to cut production four times as much as it had been offered in early March, and at a higher level than Riyadh agreed to reduce from its production.
Thus, three interlinked long-term developments will be of concern to Russia during 2020 and beyond: the COVID-19 is testing the country; Russia's domestic political stability is being challenged by Putin's proposed constitutional changes; an oil price agreement with the Saudis is largely unfavorable.
The Technical Picture
Let us have a look at the chart in order to get the broader picture of the rate situation.
If you pay attention to W1 USD/RUB, you can see the accumulation of volume and the emerging triangle. In most cases, after a strong downtrend, which goes into a phase of consolidation and this figure is graphically displayed, may tell us about further decline upon exit from the triangle support. The movement will be accompanied by a strong momentum with possible pullbacks. If the triangle is broken down, the next barrier will be the support level at 68.02 near which the price can show a false breakout and continue to move into the consolidation phase. But in case the support level is maintained and the price is fixed below 68.02 on the D1 chart, we can expect a further decline of USD/RUB to the levels 66.90 and 64.95.
Looking back at the Russian Financial Crisis of 2014 and taking into account the current situation on the market, we can assume that Russian ruble trading can be a very interesting experience. Moreover, most of the traders say that it is one of the most predictable currencies working out 100% of the signals. Once you start trading, just make sure to watch carefully all the oil news since it is the main factor affecting the rate of the currency.
If you are not sure you know how to trade Russian ruble correctly or do not know how to even trade yet, create a demo account, and get some practice until you feel confident.
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