How Far Will the Ruble Fall?

The Russian Ruble appears to be in free fall versus the US dollar. How far will the Ruble fall and will it recover? The key to this dilemma is the approach that Russian President Putin is taking in annexing Crimea and supporting separatist in Ukraine. In February of this year we wrote about the Forex response to violence in Ukraine. At that time a Ruble was worth 2.7 cents. Today a Ruble is worth 2.2 cents and it appears to be on its way farther down.

The graph from Google Finance shows us that the Ruble was reasonably steady around the three cent range at the beginning of the year and this, in fact, is where it way for most of the last five years. Then Mr. Putin became concerned about the overthrow of a corrupt leader in Ukraine as the result of street demonstrations. Mr. Putin wants Ukraine in the Russian economic orbit and most of Ukraine want to be allied with the European Union. As a result of the Russian annexation of Crimea, part of Ukraine, and support of armed separatists, the EU and USA have levied sanctions against the Russian Federation. These actions have reduced credit to Russian industry and banks. As a result of these sanctions there is a flight of capital out of Russia. And now the price of oil has fallen, reducing the Russian trade surplus.

Price of Oil and the Russian Trade Surplus

An article in Bloomberg notes that falling oil prices are cutting into the Russian trade surplus.

Russia’s trade surplus narrowed in September to the lowest in seven months as falling oil prices cut export revenue during President Vladimir Putin’s escalating standoff with the U.S. and the European Union over Ukraine. The surplus fell 20 percent from a year earlier to $13 billion, the central bank in Moscow said today on its website. The median estimate of 14 economists surveyed by Bloomberg was $15.7 billion. Imports decreased 10 percent to $25.8 billion and exports fell 13 percent to $38.8 billion.

Russia’s central bank said yesterday that the sanctions, compounded by falling oil prices, are weighing on the economy of the world’s biggest energy exporter. Growth is the slowest since a 2009 recession and may be zero next year, it said. “A stronger-than-expected decline is negative for the ruble as the trade surplus is the main underlying factor of support for it,” Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow, said by e-mail. “However, we think that the dated nature of the release should constrain its negative market implications.”

Saudi Arabia is increasing production even as its OPEC colleagues ask for cutbacks. The USA is awash in energy due to the oil fracking boom. There is no sign of a letup in Saudi or US oil production and how far the Ruble will fall is directly related to how far there trade surplus falls.

China to the Rescue?

Mr. Putin is in Beijing for a meeting of Asian Pacific leaders. He took the opportunity to finalize a deal with China to supply natural gas. This may be grandstanding or it may be a genuine attempt to solidify links with China, its old Communist neighbor. According to the online Financial Times:

When Vladimir Putin met China’s president Xi Jinping on Sunday, a memorandum of understanding for a second massive gas supply deal caught most of the attention.

For the Russian president, the deal may be less appealing for its commercial benefits than its ability to advance a larger strategic goal of cementing ties with its eastern neighbour.

To the extent that Russia can make up for lost revenue by upping its sales to China that may be an answer to how far the Ruble will fall, namely this far and no farther. Remember, however, that the two old Communist allies are actually enemies in many ways. In the days of the so called Sino Soviet bloc there were battalion sized battles on the Russian China frontier. Better for Mr. Putin if  he mends fences with the West, but would take a great deal of effort for someone who believes that the worst thing to ever befall Russia was the breakup of the old USSR.