The Russian ruble is in serious trouble. A strengthening dollar, falling oil prices and a lethargic economy have conspired to cause the ruble’s latest plunge. On Thursday, the ruble fell by about 4% to exchange at 46.68 to the US dollar. This represents a 14-year low. Cumulatively, the ruble has shed 25% of its value in 2014 alone, making it one of the worst performers in the money markets.
Analysts predict that the currency may not fall below the 50-ruble support level, however that remains to be seen especially in light of the news from the country’s central bank. The Central Bank of Russia has so far indicated that it is not going to intervene in the markets to prop up the ruble, a statement that is causing additional jitters. The central bank has capped intervention in the market to $350 million USD per day.
This is a clear shift from the interventionist policy that the bank has maintained with the ruble, which so far has seen it inject $68 billion USD to prop up the currency in 2014 alone. The bank is likely to continue down this road toward its goal of making the ruble a free floating currency by 2015, a goal set out by current chair Elvira Nabiullina when she assumed office in 2013. So far, in order to mitigate against further falls, the central bank has hiked the interest rate to 9.5 percent and activated currency repo. In a currency repo, the Central Bank of Russia provides the country’s banks with the needed dollars which it then buys back later with interest. The current repo rate hovers between 2.12 and 2.37 percent depending on the repo auction period. The maximum amount that the bank has set for repo transactions is US$ 50 billion until December 2016.
In addition to its internal problems, the ruble’s troubles have also been caused by external factors. In this it in good company with the Japanese yen which is also being hurt by a resurgent US dollar. The US dollar has been strengthening on the back of the end of quantitative easing, more commonly known as the stimulus package announced in 2008. The combination of reduced demand for US government bonds and a move toward higher interest rates have resulted in the appreciating of the dollar.
In addition, the price of oil is also in decline. The falling oil prices have largely been attributed to rising production in the US particularly in the Gulf coast refineries. According to an article in the Wall Street Journal US refiners, currently control about 20% of the world’s market for traded diesel, jet fuel and other petroleum products. This is bound to hurt the Russian ruble profoundly as the currency’s fortunes are closely tied to Russia’s oil and gas exports.
The Russian Duma is reported to be considering a ban on the circulation of the US dollar in the country. If the bill is approved, Russian citizens will be given up to a year to close their dollar accounts in Russian banks and exchange their dollars for rubles. In the present environment of economic slowdown, falling oil prices and an anemic currency, wealthy Russians will be looking for a way to convert their wealth into stabler currencies such as the US dollar. An easy way to do so would be to exchange their rubles for bitcoin that would enable them do so. However, the window of opportunity may be small and closing fast since the Russian finance minister has indicated plans to ban the use of bitcoin in 2015.
Already, there are indications that this may be happening. The ruble price of bitcoin has been outpacing the US dollar price of bitcoin in gains. The last run on the price of bitcoin was fueled in part by wealthy Chinese using bitcoin to withdraw their capital from China in 2013. At that time, the price of bitcoin hit a historic US$ 1,100, a peak that it has not been able to scale again since then. At this point, it is difficult to predict when the run will be, however bitcoin investors would be wise to watch the ruble price of bitcoin over the coming months going into 2015.
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