The Russian Financial Crisis and the Ruble

The Russian economy experienced one of the world's strongest economic booms between 2000 and 2012. Gross domestic product - which measures the total value of all goods and services produced by a country - grew by a whopping 83%. This rapid growth was largely driven by a boom in energy prices, increased arms exports and surging direct foreign investment.

However, in 2013, it all went terribly wrong. With the Russian economy collapse, the Russian ruble value crashed over 250% lower against the US dollar. Even after the Russian central bank intervened to help prop up their economy, investors continued to lose confidence. Several years later and the Russian economy has still failed to inspire confidence in investors with the Russian ruble regaining nowhere near its prior strength.

In this article, we outline some of the causes of the Russian economic collapse and why it led to the Russian financial crisis.

What Caused The Russian Financial Crisis?

There are two major factors that led to the collapse of the Russian economy in 2013: falling oil prices and economic sanctions.

1. The Russian Economy Oil Crash

Energy products - such as oil and natural gas - account for a significant portion of income into the Russian economy. In fact, according to the EIA, oil and natural gas accounted for 68% of Russia's total export revenue in 2013 alone. This has resulted in the Russian economy becoming hugely dependent on the price of energy and commodities such as oil.

During the country's economic boom from the early 2000s, oil prices were on the rise due to strong demand from emerging markets and tepid supply growth. Untapped shale oil reserves started to become available, largely thanks to advances in the oil industry such as fracking and horizontal drilling, which eventually led to the shale boom.

The unexpected surge in US and Canadian oil output flooded the market with a huge supply of oil, causing oil prices to fall 50 per cent in 2014. West Texas Intermediate (WTI) oil - a global benchmark of oil prices - traded above $100 per barrel in the summer of 2014 but started 2015 around the $50 per barrel price level. However, it was the unwillingness of the Organization of the Petroleum Exporting Countries (OPEC) to cut production levels to boost oil prices, which further exacerbated the stress on the Russian economy.

2. The Russian Economy International Sanctions

The second cause of the Russian economy collapse relates to the country's foreign policy. In March 2014, Russia annexed the former Ukrainian territory of Crimea. The move was condemned by a number of prominent international leaders and led to the exclusion of Russia from future G8 meetings, which is now called the G7.

Russia's actions also led to a number of financial sanctions from the United States and the European Union, among others. The sanctions mainly targeted the financial, energy and defence sectors. Describing the sanctions in October 2014, then US vice-president Joe Biden stated: "The results have been massive, capital flight from Russia, a virtual freeze on foreign direct investment, the Ruble at an all-time low against the Dollar, and the Russian economy teetering on the brink of recession."

So just how bad was it for the Russian economy? According to data compiled by the World Bank and the OECD, Russia's GDP growth was 1.06% in 2013, -1.07% in 2014 and -3.9% in 2015. In 2014, the country's economic growth started to contract. While the combination of the fall in oil prices and economic sanctions were two of the major reasons for the Russian economy collapse, there are some other causes which are also important to know about.

3. Russian Economy - US Dollar Reliance

The Russian economy was heavily reliant on being able to trade in US dollars. After all, most of the world's commodity markets - such as the oil market - transact in US dollars. However, sanctions placed on Russia due to US election interference in 2016 and the conflict in Ukraine have, in effect, crippled Russia's industry and largest corporations from using the US dollar.

While the country is actively trying to move away from its US dollar reliance, the weakening ruble has made it difficult. This has caused significant issues within the Russian economy as many corporations borrow in US dollars. However, the inability of Russian companies to transact in US dollars, due to economic sanctions, has made it difficult to pay off their debt obligations. This has scared off investors from the country which further exacerbated the Russian financial crisis and continues to add pressure to the Russian economy.

4. Russian Economy Oil Diversification

Even after the worst of the Russian financial crisis in 2014, a significant part of the country's income still comes from the production of oil and gas. The failure to diversify their economy has been a major point of contention on why the country's currency still has not recovered to where it was before the Russian financial crisis.

While Russian gas is sold to European countries, which could be priced in euros, the global oil and commodity trade is primarily a US dollar market. Major trading partners are unlikely to take on foreign exchange risks by dealing in other currencies. The exception is China, which has already increased purchases of Russian oil and gas in Russian rubles.

However, with more and more countries trying to move away from their reliance on oil and gas, and into cleaner energy, the Russian economy may continue to be depressed for years to come. Unfortunately, the lack of diversification has aided in weak institutions, making Russia the world's second-most unequal country, thereby putting off foreign direct investment and the opportunity for growth in the near future.

Now that you know more things about the causes of the Russian financial crisis, maybe it would be time to learn more about trading. Empowering your knowledge is easy if you register for our special trading webinars where experienced traders share their secrets and strategies. Click on the banner below to get access to them!

The Russian Economy Collapse And Fall Of The Russian Ruble

The combination of falling oil prices and international sanctions rocked investor confidence in Russia's economy. Subsequently, investors began taking their money out of Russia, selling their Russian assets and moving the proceeds elsewhere. The volatility of the Russian ruble is evident in the following price chart:

Source: Admirals MetaTrader 5, USD/RUB, Weekly - Data range: from December 21, 2014, to Nov 06, 2019, accessed on Nov 06, 2019, at 16:00 GMT. - Please note: Past performance is not a reliable indicator of future results.

This chart of USD/RUB shows the historical magnitude of the devaluation in the Russian ruble during the second half of 2014. The chart represents the value of the Russian ruble against one US dollar.

At the beginning of 2014, one US dollar was worth ₽32.84. At one point at the end of the year, one US dollar was worth ₽78.12. For corporate entities trying to pay back US dollar debt, the cost more than doubled in a matter of months. To make matters worse, the country's main source of income - oil - also collapsed as the chart below shows:

Source: Admirals MT4, WTI, Monthly - Data range: from December 01, 2006, to Nov 06, 2019, accessed on Nov 06, 2019, at 16:00 GMT. - Please note: Past performance is not a reliable indicator of future results.

Falling oil revenues combined with a free-falling currency fuelled a 250% crash in the ruble against the US dollar. After such historic moves in the Russian ruble on the back of the Russian financial crisis, what is next for the currency?

Russian Economy News & The Russian Ruble in 2024

As discussed above, the Russian economy and the Russian ruble are heavily influenced by oil prices, the US dollar, and geopolitical sentiment on the international level. Therefore, many analysts look at these markets independently to ascertain the risks the Russian economy and its currency could face.

The outlook for the Russian economy in 2024 appears mixed, with various factors influencing its trajectory. Analysts predict a modest GDP growth of around 1.5%, slowing down to 1.3% in 2025. Russia's economic performance, initially projected at 3.1% growth, could face challenges as high-interest rates persist.

The International Monetary Fund (IMF) revised down its 2024 GDP growth forecast for Russia, reflecting a more conservative estimate of 0.5-1.5%. Social spending is expected to rise, especially in national security, indicating a budgetary focus on geopolitical concerns.

The Russian ruble's performance is closely tied to economic factors and global geopolitical events. The Central Bank of Russia's monetary policy guidelines suggest potential risks, with inflation projected to increase to 11-13% in 2024, driven by supply shocks and a weaker ruble. However, the UN forecasts a marginal shrinkage in the Russian economy in 2023, followed by a return to low-medium-term growth in 2024, indicating some resilience in the national currency.

In summary, the Russian economy in 2024 faces challenges, and the performance of the ruble may be influenced by economic policies, global market conditions, and geopolitical dynamics.

The US dollar to Russian ruble (USD/RUB) or the British pound to Russian ruble pairs are just some of the currency pairs that you can trade as an Admirals' trader. Click on the banner below to learn more about the wide variety of currency pairs that we offer and that you could add to your portfolio. 

Russian Ruble Trading And The Russian Financial Crisis

The Russian financial crisis was largely caused by a significant fall in oil prices and financial sanctions. Even after several years, the Russian ruble value has still not managed to regain its 250% fall lower against the US dollar.

However, there are some interesting economic variables for traders to consider this year. If you are ready to test your trading ideas and theories consider opening a demo account to practice in a risk-free trading environment. Click the banner below to open your FREE demo trading account today!

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.