Ruble Falls Along with Oil Prices as Investors Shun Risk

The last time the Russian ruble took this large a hit in such a short period of time, we were getting our news after a three minute delay as we waited for our dial-up routers to connect to the internet. Yes, it was 1998, and Boris Yeltsin attempted to steer the economy of the Russian Federation through a rough financial crisis.

For the second straight day, the Ruble has experienced double digit declines, with a reversal of overnight gains in the ruble’s value occurring in the early hours of trading. The losses bring the ruble down to a 50 percent loss against the U.S. dollar for the year, with an 11 percent loss on Tuesday and a closing rate of 73 to 1 against the dollar.

The second consecutive day of high losses came even after the Central Bank hiked key rates into the high double digits (from 11.5 percent to 17 percent, an increase greater thank 50 percent) in an attempt to stimulate demand for Mother Russia’s currency. It didn’t work. The theory behind the interest rate hike is that if the ruble can earn a (much, much) higher return in Russia than the dollar or the euro or the yen can in their respective home countries, demand for the ruble will increase – and so to will its price relative to other currencies – putting an end to the currencies losses. The fact that this monetary maneuver proved futile indicates a strong lack of trust in the central bank’s ability to manage this crisis and expectations of a continued and sustained degradation of the currency’s value.

The losses are largely attributed to the decrease in the price of oil (Brent crude fell 4 percent to close at $58.78 a barrel), but a weakening of the economy earlier in the year as a result of sanctions imposed by Western nations in response to the crisis in the Ukraine have also played a role in weakening the currency. Additionally, the reluctance of investors to place or keep money in high risk assets as the year closes, and as they seek to solidify their annual returns figures, has stemmed much of the speculation that might have mitigated the sharp drop in the ruble in other quarters. Other currencies have not been immune, and the Norwegian krona, which is also strongly linked to the price of crude oil, has fallen 5 percent against the dollar.