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The Ruble is in Trouble!

Russia is now faced with another possible huge devaluation of the ruble.

While some still say that nothing has changed, the crisis is evidently imminent, and whether it is going to be a major fall in the value of the ruble or just a small percentage downslide, either way, it is going to spell doom for the already cringing economy.

The early years

In the initial years there were very few Soviet people who had dollars – in fact, possessing foreign currency was illegal.

All the Soviet diplomats, scientists, actors, etc who traveled abroad and earned foreign currency had to exchange it upon their return.

And the exchange is not for rubles!

Dollars had to be exchanged for "cheky" – special checks that were accepted only at stores belonging to the Beryozka chain, which offered foreign foodstuffs and goods.

The going rate for a "Cheky" in the black market used to be two rubles.

After the Iron Curtain went down, Russia experienced a mini currency crisis in the early years of its transition and inflation was rapidly climbing up the 2-digit ladder.

In order to bring down inflation to a single digit figure, to ensure financial stability and growth of the economy Russia implemented a ruble-dollar exchange rate in consultation with the International Monetary Fund.

Further management of this exchange rate from 1995 to 1998 combined with a tighter monetary stance helped Russia maintain low prices.

The low inflation rate, high interest rates and relatively stable oil prices in 1997 helped to escalate the demand for ruble.

With the demand for the ruble came the assurance of a stable economy, which opened the way for ‘euphoric’ capital inflows during 1996-97.

All this was suddenly over turned with the successive devaluations in a number of East Asian economies in the second half of 1997 and the sharp decline in oil prices from January 1998 onwards.

Though the Central Bank of Russia was initially able to address the resulting outflows from the economy, it was ultimately forced to finance the ever increasing budget deficit by redeeming maturing treasury bills on behalf of the government.

As oil prices fell from $17 per barrel in the first two months of 1998 to less than $12 per barrel by the second financial quarter, outflows further accelerated and lead to the ruble crisis in August 1998.

The Ruble Crisis of 1998!

What would you do when you know that an item that’s a necessity for you is going to very soon run out of stock in the market? You would go out and buy more of it, stock it, if possible, right?

Well, that’s what the Russians also did – sensing the downfall of the economy due to huge outflows of capital and investments, assuming that the only way to safeguard their earnings would be to convert them into foreign currency, many Russians bought dollars in unimaginable volumes.

But later, the government couldn’t pay back the burdensome foreign debt that ran into almost $40 billion and decided to devaluate the ruble.

Suddenly, all those who didn’t go after the dollar but retained their savings in rubles had to face a stream of losses due to the devaluation.

Soon, hundred dollar notes became common currency in Russia!

Under Putin Russia amassed tremendous amounts of dollars through their oil and gas reserves. An enormous economic boost also helped strengthen the economy and expectations of growth were surpassed – by around June this year, the government had a surplus of 600 billion dollars!!

The cycle returns after a decade!

Just a couple of months ago, we had the Kremlin talking about pricing its oil in rubles and making the ruble a regional reserve currency, giving it a status closer to that of the euro and the dollar.

Subsequently, due to the high costs of the war with Georgia, the stock market crashed and suddenly the price of oil was slashed by over 50 percent.

It doesn’t require much observation to note that the ruble had been on a steady decline for over 4 weeks and continued collapsing until the Central Bank intervened to arrest a further decline.

The Central bank is now spending as much as $600 million a day to buy rubles and support the currency's exchange rate, and the cost of defending the ruble is projected to be as high as $50 billion!

The question now is: will Russia be able to continue doing this, and for how long?

Obviously, measures to slowly devalue the ruble are already being put in place. Furthermore, to avoid the shock of the sudden fluctuations in the value of the ruble, the Central Bank is trying it play a balancing act between the dollar and the euro.

Though it has not yet reached the common man, the imminent crisis is quite visible. Very soon, the withdrawal of the government support to the ruble would be public and there would be a sudden rush to buy more dollars, like it happened in the 1998 crisis.

Though the Central Bank continues to reassure markets it would continue to support the Russian currency, the crisis of 1998 has not yet been fully forgotten by the Russians.

The outflows of capital have again started, the stock market has crashed many a times, and the exchange of ruble to dollar is already underway and accelerates every day.

Very clearly, Russia is on the verge of another huge Ruble crisis.

About the Author

Corney Vanhelden is a successful entrepreneur and international businessman with many years of experience. This article is a short note on one of the chapters of his new book `How to Survive without Taxes`, see his site for www.Done-with-IRS.com specifics.

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