The Ruble bubble

Just like any other currency, Russia’s ruble is falling down the drain, steadily losing its value against the US dollar and euro. The ruble has lost a fifth of its value since summer and Russians are fear the return of the dark days of 1998.

The “Ruble Crisis” in 1998 was triggered by the Asian financial crisis which started in 1997. Now, Russians pile into currency exchange establishments to have their rubles changed into US dollars. Many have decided to close down their bank accounts and convert the ruble into foreign currency. They believe that in doing so, financial security is locked down.

“It's going to be a very hard year for Russia and its economy," said Yulia Tseplyayeva, chief economist at Merrill Lynch's Moscow office. "And it could be much worse than it was in 1998. In 1998, the crisis wasn't global, and there were healthy parts of [the] world economy that boosted demand for oil. Today's crisis is deeper."

The ongoing crisis of the Russian financial market is rooted to the following events: the world economic crisis; war with Georgia and the plummeting price of Urals heavy crude oil which has lost more than 70% of its value. Thus, Russia’s currency reserve (which is the third biggest in the world) has no match for all of the mentioned root causes of the devaluation.

"The reserves are reaching a critical level with severe pressure on balance of payments from capital outflows and a very poor outlook for oil prices," said Benoit Anne, currency strategist at Merrill Lynch in London. Last week, the central bank signaled a change of tactic: No longer prepared to spend Russia's dwindling foreign exchange reserves on defending the currency, it's getting tougher on its banking sector, in part by restricting short-term ruble liquidity in an effort to get the banks to convert some of their foreign currency back into rubles.

And it seems to be working. According to bloomberg.com, the ruble strengthened against Russia’s dollar-euro basket for the first time in 11 days as the central bank increased the interest rate it charges on repurchase loans to stop banks using the money to speculate against the currency.

Though the move proved to be effective, economists say that the current situation is just temporary. As to how long can the ruble hold up? Hard to say, we have a long year ahead.  

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