The Russian ruble rebound could be over. On August 3, both the U.S. dollar and euro posted strong gains against the ruble, leading to questions about the future of the Russian currency.

A man walks past an exchange office sign showing the currency exchange rates in Moscow, Russia, Monday, Aug. 3, 2015. The ruble further declined in trading in Moscow Monday, driven down by a drop in global prices for oil, Russia’s main cash earner. Photo: AP

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It’s been a miserable start to the week for the Russian ruble. On Monday, August 3, the euro shot above 69 rubles, while the dollar approached the 63-ruble mark. The drop in value of the ruble is linked to the price of Urals oil, which now trades at less than $50 a barrel amid statements by the Iranian Ministry of Oil that Tehran is ready to start supplying fuel to the world market.

The Russian ruble is truly a commodity currency, so its exchange rate dynamics are largely dependent on world prices for raw materials, including oil and gas. It is not alone in this category — other members of the commodity currency club are the Norwegian krone, the Kuwaiti dinar, and the Australian and Canadian dollar. These currencies also take their cue from energy prices. However, their fluctuations are considerably less pronounced than those of the Russian ruble. Why?

Some of the reasons are all too obvious, but that does not make them any less important.

The disproportionately large share of oil and gas as part of Russia’s national economy, exports and budget revenues is among the biggest culprit. Comprising just 4 to 6 percent of budget revenues 20 years ago, the energy sector today accounts for almost 40 percent of federal income. That is unacceptable for the world’s seventh largest economy. The situation has been evolving since 2000, when the planet entered a period of “expensive oil,” and cannot be rectified overnight, despite the best efforts of the Russian government.

Western sanctions on the Russian economy are another (albeit superficial) reason for ruble volatility. The sanctions themselves target specific Russian banks and companies, with little effect on the national economy and no impact at all on the Kremlin’s policies in relation to Ukraine. But their psychological impact on Western business circles in Russia has clearly been underestimated.

When it comes to cooperation with Russia, Western businesses often play overly safe, either walking away or imposing their own sanctions that go far beyond those prescribed by Washington and Brussels. This “self-censorship” reflects the continuing influence of the United States in the developed world, and the anxiety of big business over a further tightening of sanctions.

Fears of a new wave of global economic recession are the third reason affecting the Russian currency market. The euro zone’s teetering on the verge of collapse, combined with weak economic growth and record unemployment, is just one dampener on the world of business.

In June 2015 there was bad news from China too, where stock market volatility has exceeded even the most negative forecasts. Fears that the U.S.-initiated Transatlantic Trade and Investment Partnership (with the European Union) and the Trans-Pacific Partnership (with Asia) will hurt the liberal nature of the global trading system also cannot be ignored.

Lastly, the long-awaited rise in the U.S. Federal Reserve interest rate could spark a wave of speculation against the currencies of developing countries. Previous experience shows that such a decision will be followed by approximately 12 to 24 months of an overvalued dollar, with inflows of investment to the United States and outflows from emerging markets, which now include Russia.

The Russian currency is losing appeal in the eyes of market operators for structural reasons. They include the weakness of market institutions (corruption, poor contractual discipline), the small capitalization of the Russian stock market (today it is only 33 percent of GDP), and the excessively large role of the public sector in the national economy.

Neither should we forget that today the Russian ruble satisfies the criteria of a freely convertible currency as enshrined in the charter of the International Monetary Fund (IMF). But for investors, it does not have sufficient “credit history” to be used more extensively in the world economy, and remains a newbie in the global financial markets.

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Another cause of the volatility is the continuing distrust of Russian and foreign market players in the Bank of Russia’s ability to act promptly and effectively—Russia has a reputation for currency crises and “Black Tuesdays.”

It is inadmissible for the Russian government to delay reforming inefficient public corporations and liberalizing access for foreign investors to specific sectors of the national economy, or to make half-hearted efforts to ensure the independence of the judiciary and raise the level of transparency in providing financial assistance for crisis-hit state companies.

Government and parliament are no doubt looking at all these areas, but so far positive results have been few and very far between.

Aware of this, market operators find it more convenient to look to the price of oil in determining the exchange rate of the ruble, rather than the multiple factors traditionally taken into consideration by experts. After all, Russia’s trade balance, supply of money in the domestic market, inflation figures, unemployment data, agricultural growth and steady industrial sector suggest that the exchange rate should be stable or fluctuate within a limited range.

The openness of the Russian financial market to foreign players makes the highly volatile Russian ruble even more attractive to speculators.

Furthermore, at a time of rising tensions between Russia and the West, both sides are in search of a new modus vivendi, one that takes into account the real alignment of forces and interests of the parties.

The sanctions war is presently going through a lull, and the long process of finding compromises to exit the most acute crisis in Russia-West relations since the Cold War is beginning. If this process gathers momentum, there will be noticeably less pressure on the ruble exchange rate.

For sure, the role of oil prices in the exchange rate of the ruble is greatly exaggerated. Even if one assumes that the Bank of Russia is deliberately softening its monetary policy to keep ruble-denominated revenues from oil exporters steady, its actions do not give grounds to expect a currency crisis in the country. Russia will experience new “currency shocks” only if the central bank abandons its fairly tight monetary policy since December 2014, and under the influence of Russia’s industrial lobby opts for an inflationary stimulation of economic growth.

There is no evidence as yet to suggest that the Russian authorities would resort to such scenario. Consequently, Russia still faces a relatively long period (two to three years) of significant, but declining fluctuations in the exchange rate of the ruble.

The opinion of the author may not necessarily reflect the position of Russia Direct.