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With a dramatic drop and a swift severing of avenues — the Russian ruble has collapsed.
In the 72 hours after the Russian invasion of Ukraine, the Russian ruble lost 50% of its value against the U.S. dollar; meaning anyone holding rubles can buy far less with their money. And that has far reaching implications.
When a currency collapses, that means the value of that currency goes down as compared to other currencies. The exchange rate for dollar to ruble has been steady over the last year sitting between 70 and 80 — the amount of rubles it costs to buy a dollar. In this case, the higher the number, the more expensive it is for Russians to do business outside their own country.
The value was steady until Feb. 28 when it went higher — opening at 96 and surging to 120 by the end of the day.
If 80 is the base and now we’re 120, it’s basically depreciated by 50%. What does that mean? If you’re trying to do international business using Russian rubles then it costs more rubles to purchase the same amount of U.S dollars. It’s a lot more expensive for Russians to do business outside of their own currency.
Sanctions and SWIFT
When a currency collapses, there are usually a few roads to recovery. But in the case of Russia, those roads are closed.
When a currency depreciates, the country’s exports become cheaper. In this situation, this means it’s cheaper for other countries to buy rubles; therefore, Russian exports like oil and gas are cheaper. Over time, this would help the Russian economy recover.
But there’s a caveat because of all of the sanctions that have been put in place. It doesn’t really matter that the currency has depreciated in this situation because people aren’t trading with Russia anyway. So it won’t have the same effect we’ve seen with other depreciated currencies.
In addition to the sanctions, there’s the removal from the Society for Worldwide Interbank Finance Telecommunication (SWIFT) payment system.
Then there’s the Central Bank of Russia. When a central bank wants to protect or help its currency, they go to the foreign exchange markets and buy currency to try to force the currency back to levels they’re happy with. The trouble for the ruble is, the sanctions put in place limit the central bank’s access to their reserve and they’re not allowed to trade on the foreign exchange markets, so that’s not an option for Russia right now.
The U.S. Treasury and European Central Bank have also gotten involved, saying they’re freezing Russia’s foreign reserves. This essentially means that while the Russian Central Bank holds billions of U.S dollars in reserves (that could be converted to rubles during a crisis), they cannot access any of those assets.
There’s not much Russia can do right now to help their currency.
Economic impact
Russia is a bit of a one trick pony — oil and natural gas is all they do. They export oil and natural gas to Europe. The only way it’s likely to have a global economic impact is if the conflict doesn’t stop with Ukraine. If he went for Poland or Finland, for example, that would have a huge effect on the global economy.
The collapse of the currency in itself may not have significant global economic impact — but mistrust of Russian leadership and the circumstances surrounding the invasion of Ukraine has caused global commodity price to skyrocket, especially those coming out of Russia. This has had an effect on inflation worldwide, which in turn has caused some major stock markets to sell-off aggressively.
Europe gets more than 30% of its oil and natural gas from Russia, and after Putin’s actions it’s likely Europe — Germany in particular — will look for other sources to mitigate future risk out of a distrust of the Russian government.
But Russia’s economy is a different story.
Right now, Russians are lining up at banks and ATMs trying to get their hands on cash because they’re afraid their rubles, or even the banks, won’t be there tomorrow.
And living in Russia is more expensive now — it will cost far more rubles to buy the same amount of goods.
We can’t flip a switch and put this back to normal. Many businesses have pulled out and said they don’t want to support Russia, and it’s unlikely most of them will go back. That will have a long-term economic effect on Russia.
Things aren’t going to go back to where they were. I think there’s going to be long-term damage to the Russian economy.
Investor impact
The higher the current interest rate for a currency is, the more attractive it is. But looks can be deceiving.
If you can invest somewhere and have it make 20% in a year, that’s attractive. If I invest in the ruble now at 120, and interest rates are 20%, at the end of the year I’m going to make 20% on my rubles, theoretically.
But there’s a caveat. If the exchange rate moves and goes down more than 20%, you’re going to give away all of that money you’ve made on the interest. “So, it doesn’t matter if you’re going to make 20%; as a U.S. investor, you’re going to lose 50% on the exchange rate.”
This collapse affects those investing in or doing business in Russia. Any overseas company doing business in Russia that has an investment or an asset with be negatively impacted by the precipitous drop in the currency. Outside of Russia that has any asset, like an investment, in Russia, it’s now worth 50% less than what it was. In many instances, this could mean your investment is disproportionate to the value.
In my experience, the way these variables have all come together is unprecedented. Currencies have collapsed, but this was a dramatic drop — very quickly — and the methods of recovery were severed. I haven’t seen this in the 30-plus years I’ve been in this business. There are so many variables at play, so we’ll all just have to keep an eye on the situation and how it’s unfolding.
Peter Tibbles is a senior vice president of foreign exchange trading for BOK Financial.