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Sanctions and oil prices are creating a slippery slope for Russia’s Rouble

December 18th, 2014 - Posted by Debbi Lyle Essey in Sanctions

Monday night saw the Russian Central Bank raise interest rates in an attempt to stabilise the volatile Rouble, but the national currency continued to drop in value on Tuesday, reaching a low of 79 Roubles to the Dollar.

In an attempt to stabilise the currency, Russia's central bank increased interest rates to 17%, while the government announced it would sell its foreign currency stock.  While not completely averting financial crisis, the government's effort has managed to recover 10% against the Dollar.

The value of the Rouble is linked to the price of crude oil, which is now trading at $60 per barrel.  The fall in the price of crude oil has brought down the value of the Rouble, which has been in steady decline since June, when the first wave of sanctions were announced by the US and EU.

Sanctions imposed on Russia mean that the country receives no international funding. Russian businesses are unable to raise finance and are required to repay all foreign debt.

Traditionally the price of crude oil and the value of the Rouble move in parallel and since June this has been the case, with oil prices falling by almost half and the Rouble by 39% when compared to the Dollar.  In the past few days however, the value of the Rouble has fallen 25%, far more than crude oil at 6%.

US President Barack Obama has agreed to sign a bill imposing further sanctions on Russia, despite his own personal reservations.  The new bill is primarily aimed at Russia's defence sector and passed through Congress with almost unanimous support.

The US Secretary of State, John Kerry, met Russia's foreign minister in Italy and indicated that the new sanctions could be lifted in a matter of weeks, if President Putin addresses the US' concerns.

A large proportion of consumer goods and food is imported into Russia and the slide in the value of the Rouble has drastically reduced the country's purchasing power.  The Russian economy has benefited from high oil prices in recent years, so the reversal will have a significant impact on the lives of Russian citizens.

Apple has announced that it will halt sales in Russia due to the volatility of the Rouble, saying that the fluctuations in value are too dramatic to price its products.  Other companies could follow.

In his recent state of the nation speech this month, President Putin implored Russians to take advantage of sanctions and the falling rouble by developing domestic industries and national infrastructure.

The difficulty for individuals and entrepreneurs trying to take Putin's advice is that little was achieved in terms of investment in small businesses and start up opportunities during Russia's prosperous years.  Entrepreneurs now have little or no access to the finance necessary to stimulate the economy.

Despite President Putin's reluctance, if Russia is to turn its economy around in the wake of falling crude oil prices it seems it will have to take heed of US and EU sanctions.  While the lifting of sanctions on Russia is no guarantee of an economic rotation, with sanctions still in place it seems all but impossible.

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