This week Russia witnessed the biggest decline in the value of its national currency, the ruble, since the crisis of 1998. Russia Direct asked analysts what might come next, and about implications for Russia’s economic development.

People wait to exchange their currency as signs advertise the exchange rates at a currency exchange office in Moscow, Russia. Source: AP

On Tuesday, Dec. 16, the ruble staged a historic decline, dropping as much as 20 percent to reach a low of about 100 rubles to the euro and 80 rubles to the dollar before recovering some lost ground. Since January, the Russian currency has lost about half of its value versus the dollar and the euro.

The drop on Tuesday came in spite of Russia's Central Bank surprise after-hours announcement the night before that it would increase its key interest rate from 10.5 percent to 17 percent. 

On Wednesday the 17th, however, officials managed to help the ruble claw back some of its losses. Amid volatile trading, the currency rose to a rate of about 60 rubles against the dollar, as Russian Prime Minister Dmitry Medvedev said Russia has enough market instruments to resolve the crisis and the Finance Ministry announced it had begun selling foreign currency. 

Amid this volatility, observers are asking: What will it take to stabilize the ruble? 

Even if the decision to raise the key interest rate helps the ruble, it will also likely have a negative impact on Russian economic growth by increasing borrowing costs for businesses. Some say a deep recession is now a certainty for Russia.

“What the economy is losing now is not that significant in comparison to what we might lose if we just do nothing,” says Evgeniy Nadorshin, chief economist at Sistema JSFC. “If we catch the train that is leaving, we might fix the short-term losses in a course of one year.” 

Anton Soroko, an analyst with the investment holding Finam, believes regulators still have a chance to resolve the current crisis. He hopes that Russian companies’ low stock market valuations will attract investment into the country “after the situation on the currency market stabilizes.”

Russia Direct asked analysts for their thoughts on the issue. Here’s what they said. 

Ivan Kapitonov, Deputy Head of the Department of State Regulation of the Economy at the Russian Presidential Academy (RANEPA).

The ongoing decline of ruble is due to a number of factors, the most important of which is the fall in the oil price.

The price of brent crude is expected to decline and hit $40 per barrel in January-February. If this happens, the Russian currency will reach new lows of between 88 and 95 rubles to the dollar.

However, this oil price cannot last long. It is detrimental not only to Russia, but also to the United States. The reason for this is that the current situation in the U.S. economy differs greatly from that which was in place in 1980s (when the U.S. carried out the destruction of the Soviet Union via its agreement with the Saudi Arabia to decrease the price of oil). Today’s decline in oil prices is very beneficial to energy inefficient states like China and India, and also to energy-dependent states like those in the EU. They are ready to export cheap products to the world markets, forcing out the U.S.

As a result, the competitors of the U.S. are in a good position. This is not in the interest of the U.S., which aims to continue to increase expensive shale oil production. The U.S. will be forced to deliberately reduce the economic benefits of its [exploitation of shale oil], close fields that are not cost-effective, and once again reduce their energy independence.

The further decline of oil prices therefore poses a direct threat to the interests of America. Therefore, this is the country that, using its influence in the Middle East, will not allow the situation to develop in this direction further.

The ruble might not only strengthen, but also win back its position by the end of the next year.

Stanislav Tkachenko, Ph.D. in Economics, Professor at St. Petersburg State University.

In order to foresee the future of the ruble, it is necessary to recognize the real reasons behind the current crisis. Apart from such important factors as the lack of professionalism in Russian monetary and financial management, the decline in oil prices and the overall growth in financial markets’ volatility, the key factor that made the crisis so inevitable and disruptive was U.S.-led sanctions campaign, joined by the Western Europe. It is obvious now that Washington declared a currency war against Russia. Regretfully, the Kremlin acknowledged this four months after it started, in the beginning of August 2014.

Let us admit: It was only the high level of professionalism of the U.S. Treasury Department staff that made it possible to carry out the full-scale blockade of Russian money in a contemporary era of unprecedentedly cheap money, a time when Western banks are ready to enter any region of the planet in search of 3 percent profit. However, such a policy has costs for U.S. taxpayers. It won’t be possible to keep private financial institutes under pressure for long. Sanctions don’t bring profits.

Therefore, I believe that after a period of high currency instability, when exchange rates may fluctuate with an amplitude of 10-15 rubles at the course of one day, the Russian ruble will experience an upward trend. In February 2015 the Russian ruble will reach a new level of around 50-55 rubles to the U.S. dollar. This will, however, require a number of conditions, including a refusal by the Russia’s Central Bank to allow excessive ruble emission, cautious foreign policy actions and a significant pivot to Asia. Russian policy-makers should at last start to work on the opening of Asian financial markets for Russian banks and corporations, agree with China and, possibly, South Korea on a system of swap agreements for the mutual support of our national currencies.

The crisis of the Russian ruble will bring an economic downturn that will affect our partners from the Eurasian Economic Union and our closest neighbors. Finland, Austria, Italy, Germany and the Baltic states will also experience the consequences of the crisis in their own economies. They can forget about positive GDP growth at this point. Especially in a situation when the practice of sanctions continues to persist.

An electronic board shows the exchange rate for the euro, Dec. 16, 2014. Photo: AP

Alla Dvoretskaya, Head of the Department of Economics and Finance at the Russian Presidential Academy of National Economy and Public Administration (RANEPA).

The steep decline of the ruble, notwithstanding the consistent character of interest rate hikes, signifies a lack of trust in the actions of Russian authorities. Theoretically the increase of rates might have hampered devaluation, making liquidity too expensive and inaccessible for currency speculators. Simultaneously, it may have a positive influence on inflation trends. However, it is practically impossible to reach these goals in the short term. The first reason for this is that both devaluation and inflation are caused not by monetary factors, but by a combination of negative fundamental marcoeconomic and geopolitical factors.

Second, rate hikes haven’t played a major role in preventing the currency crisis. Thirdly, fighting speculation is useless, because it is a consequence of the ruble’s fall rather than a prerequisite. If the main issue were the evil intentions of speculators, it would be enough just to carry out administrative measures more actively (such as increasing currency position limits or introducing the obligatory realization of currency by exporters, etc.)

Unfortunately, all we can do at the moment is wait for the normalization of the external pricing environment, and for a sound realization of government’s strategy to address the crisis. In the meantime, it seems that the fear of recession outweighs the anxieties of the currency crisis, even more so given that devaluation helps to stabilize the balance of payments and facilitate the implementation of the state budget. On the other hand, devaluation will also lead to a sharp decline in the level of living standards.

Christopher A. Hartwell, Research Fellow at the Skolkovo Institute for Emerging Market Studies (SIEMS) at the Moscow School of Management – SKOLKOVO, as well as President of CASE – Center for Social and Economic Research in Poland.

While the Russian economy has been on a downward drift for two years, primarily exacerbated by events in Ukraine, the trigger for this collapse was the decision taken by OPEC at its ministerial meetings on Nov. 27 to keep global oil production at current levels. World oil prices had already been steadily declining over the past six months, but this decision led to a freefall in oil prices that took the ruble with it.

At the same time, Russia’s partner in the Eurasian Union, Kazakhstan, has already seen itself buffeted by the currency and economic turmoil emanating from Russia. Reliant on oil prices, both economies are sensitive to commodity fluctuations, and that highlights just how difficult deeper integration can be for the Eurasian Union. This is especially true when the main source of risk to each economy is the same.

The Russian addiction to oil revenue to fuel the national budget is well-known, and it has gotten worse in the post-global financial crisis world. Oil and gas now make up 68 percent of Russia’s exports and revenues from these sales constitute well over half of the federal budget. Moreover, the government budget has become more reliant on oil’s price remaining consistently high.

[Read the full opinion here.]