The Russian Financial Crisis and the Ruble
Reading time: 11 minutes
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 a Russian economy collapse, the ruble 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 Russian economy news has still failed to inspire confidence in investors with the ruble regaining nowhere near its prior strength.
In this article, we outline some of the causes of the Russian economy collapse and why it led to the Russian financial crisis. Understanding just a few of these reasons can help in identifying the outlook - and possible trading opportunities - for the Russian economy and the ruble this year.
What Caused The Russian Financial Crisis?
There are two major factors which led to the Russian economy collapse from 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 to 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 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 is 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, have in effect crippled Russia's defence 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. And, while the country is a major exporter, the US dollar accounted for 68 per cent of inflow settlements in 2018.
This has caused significant issues within the Russian economy as many corporations borrow in US dollars. However, the inability for 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, 50 per cent 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 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 news may continue to be depressed for years to come. Unfortunately, the lack of diversification has aided in corrupt and 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.
The Russian Economy Collapse And Fall Of The 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: Admiral Markets MT4, USD/RUB, Monthly - Data range: from September 1, 2009, to March 14, 2019, accessed on March 14, 2019, at 5:38 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
This chart of USD/RUB shows the historic 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. During 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: Admiral Markets MT4, WTI, Monthly - Data range: from August 1, 2009, to March 14, 2019, accessed on March 14, 2019, at 5:50 pm 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? Let's look at the influencing factors.
Russian Economy News & The Ruble in 2019
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.
Some analysts will look at economic data provided by Russia's official statistical agency, Rosstat. However, a deeper understanding of domestic projects is required. For example, in 2018 the Russian economy grew by 2.3 per cent. Some analysts would start to call a 'potential turnaround' in the Russian economy. However, this figure was possibly due to a big upward revision in construction data due to the completion of a large liquefied natural gas facility in the Yamal region.
Therefore, one of the best ways to forecast what could happen next in the Russian ruble is to analyse the price chart of its currency, as it provides the collective thinking and actions of all the buyers and sellers of the currency.
Trading the Russian Ruble
Let us look at both the fundamental and technical analysis picture.
The Fundamental Picture
Oil prices have started the year pushing higher thanks to agreed production cuts by OPEC and Russia in December 2018. However, Saudi Arabia announced deeper than expected cuts which have helped oil prices to surge higher at the beginning of this year. This has helped oil related currencies to also move upwards, such as the Canadian dollar, Norwegian krone and the Russian ruble.
The ruble has also benefitted from the US Federal Reserve slowing their path of interest rate hikes. This has taken some of the bullish momentum out of the US dollar. However, with a strong US economy, the potential for the Fed to change stance quickly is worth remembering.
The Technical Picture
In the monthly price chart of USD/RUB below, the two black diagonal lines represent support and resistance levels which show a consolidation, or wedge formation. Traders will often use these levels to trade off and for bias on the future direction of price.
The consolidation, or wedge pattern, formation highlights a market which is trading in a long term range. Considering the Russian ruble crashed 250% just a few years ago, many buyers and sellers would rightly be cautious thereby keeping the market in a trading range.
Source: Admiral Markets MT4, USD/RUB, Monthly - Data range: from August 11, 2011, to March 15, 2019, accessed on March 15, 2019, at 12:32 pm GMT. - Please note: Past performance is not a reliable indicator of future results.
Remember that, as price moves higher on the chart, it shows the US dollar is strengthening and the Russian ruble weakening. As price moves lower, it shows the US dollar is weakening and the Russian ruble strengthening.
So far, the start of 2019 has seen sellers step into the market to push USD/RUB lower, after hitting the top resistance level of its wedge formation. Many traders will now be watching to see if sellers can hold their ground and push the exchange rate to the other side of the wedge formation - the lower support level.
However, if buyers manage to take control of the market and break through the top resistance level then there could be more pain to come for the Russian ruble as traders will attempt to get it back to previous high price levels reached during the 2014 Russian financial crisis.
The volatility of the Russian economy collapse has provided strong trading opportunities for traders who are comfortable with the added risk of trading such events. The Russian financial crisis was largely caused by a significant fall in oil prices and financial sanctions. Even after several years, the Russian ruble 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!
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.