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Russian financial crisis (2014–2016)

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The 2014 Russian financial crisis[1][2][3] is the result of a rapid decline in the Russian ruble relative to other currencies during 2014 and a slowdown in the Russian economy.[3][4] One of the factors contributing to the economic decline is that crude oil, a major export of Russia, has declined in price nearly 50% from the yearly highs in June 2014 to December 16, 2014.[3][5]

It has affected the Russian economy, both consumers and companies, as well as having a negative impact on global financial markets. The Russian stock market in particular has experienced large declines, with a 30% decline in the RTS Index from the beginning of December through December 16.[6]

Economic sanctions

Event Date USD to RUB Ref
Start of Euromaidan Nov 21, 2013 32.9975 [7]
Annexation of Crimea Mar 18, 2014 36.2477 [8]
Donbas status referendums May 11, 2014 35.2270 [9]
Abkhazian Revolution Jun 1, 2014 34.8747 [10]
Minsk Protocol Sep 5, 2014 37.0028 [11]
Donbas general elections Nov 2, 2014 43.0072 [12]
Central Bank intervention Dec 16, 2014 68.4910 [13]

Any international aid to Russia is considered unlikely as a result of the 2014 Russian military intervention in Ukraine.[3] U.S. White House officials have also said, despite the financial crisis, that the United States and the European Union will not ease economic sanctions imposed on Russia due to Russia's annexation of Crimea and Russian assistance to Novorossiya militants fighting Ukraine in the War in the Donbass.[4] The U.S. believes the sanctions have negatively impacted the Russian economy so far and also expects the economic sanctions to lead to the further decline of the Russian economy.[4]

Economic sanctions have also contributed to the decline of the ruble since Russian companies have been prevented from rolling over debt, forcing companies to exchange their rubles for U.S. dollars or other foreign currencies on the open market to meet their interest payment obligations on their existing debt.[14]

Russian monetary policy

Decline in the Russian ruble

Since the Great Recession, yields on U.S. treasuries and other low-risk assets have decreased due primarily to the liquidity-trap and also unconventional stimulative measures by central banks, such as ZIRP and quantitative easing. This has led to a "reach for yield" with emerging market debt being bought by developed economy investors due to investors seeking greater interest on their holdings of debt. This led to increased issuance of debt by Russian companies in foreign currency-denominated terms, with $502 billion in foreign-currency denominated debt as of June 2014, up from $325 billion at the end of 2007.[3]

Due to the recent decline in the Russian ruble, it has increased the costs for the Russian companies to make interest payments on the debt. Since the debt was issued in U.S. dollar or other foreign currency terms that have strengthened against the ruble, it costs Russian companies more of their ruble-denominated revenue to repay their debtholders in dollars or other foreign currencies.[15]

Official exchange rates USD/RUB and EUR/RUB set by the Bank of Russia from 1 September to 18 December 2014[16]

Central bank intervention

On December 15, the Central Bank of Russia spent almost US$2 billion in an attempt to strengthen the declining ruble.[17]

Just before 1 a.m. local time on December 16, 2014, the Central Bank of Russia increased its key interest rate from 10.5% to 17% in an attempt to slow or stop the decline of the Russian ruble.[18][19] It was the sixth increase in interest rates by the Central Bank of Russia during 2014.[18]

Even after the central bank's intervention early in the morning, the ruble declined further. At one point later in the morning on December 16, 2014, it took 79 Russian rubles to purchase one U.S. dollar, a decline from the rate of 33 rubles to the dollar in January 2014.[19] The ruble strengthened off the lows on December 16 after the Russian central bank said it would not implement capital controls.[20]

Financial and economic impact

Russian impact

Currency exchanger in Moscow. The majority of banks in Russia have tables only with 4 digits, while in December 2014 some banks set exchange rates that needed 5-digit table.[21]

On December 16, 2014, the RTS Index, denominated in U.S. dollars, declined 12%, the most on any given day since the midst of the global financial crisis in November 2008, and the Micex index declined 8.1% at one point before ending the day higher. This increased the decline of RTS Index, up until December 16, of nearly 30% during the month of December.[6]

To get rid of their rapidly declining Russian rubles, many Russians have chosen to purchase durable goods, such as washing machines, televisions, furniture, and jewelry, and to change their pensions and savings from being in rubles to U.S. dollars or euros.[22][23] Several currency exchangers offered cash only at much greater exchange rates: USD up to 99.8 RUB (official rate was 61.15)[24] and EUR up to 120-150 RUB (official rate was 76.15).[25][26] Some foreign companies have halted their business activities in Russia, including Volvo car dealerships and the online store of Apple, due to the high volatility and decline of the Russian ruble.[23]

Many Western financial institutions, including Goldman Sachs, have started cutting the flow of cash to Russian companies since they have restricted some longer-term ruble-denominated repurchase agreements (repos). These actions are intended to protect the Western firms from the high volatility of the ruble. Repos had allowed Russian companies to exchange securities for cash with Western financial institutions, so the restrictions are likely to add pressure to the Russian financial system.[27]

Russia may also be excluded from the MSCI Emerging Markets Index, composed of 26 countries' indices, if capital controls or currency controls are implemented by Russia, since such measures would make it more difficult for foreign entities to access Russian securities markets. Russia would be reclassified as a standalone market in that event.[28]

Global financial markets

The financial crisis in Russia has impacted other global financial markets. U.S. financial markets declined, with the Dow Jones Industrial Average down nearly 3% in 3 business days, in part due to the Russian financial crisis.[29]

Foreign exchange trading service FXCM said on December 16 it would restrict U.S. dollar-ruble trading starting December 17 due to the volatility of the ruble. They also said that most Western banks have stopped reporting the exchange rate of the U.S. dollar for rubles (USD/RUB). Liquidity in the U.S. dollar-ruble market has also declined sharply.[27]

Financial institutions that hold relatively high amounts of Russian debt or other assets have been impacted by the Russian financial crisis. Almost every option held by PIMCO on its holdings of Russian debt is now out-of-the-money, meaning they could not be sold at the moment to receive any value. The PIMCO Emerging Markets Bond Fund also had 21% of its holdings in Russian corporate and sovereign debt as of the end of September 2014, which has declined about 7.9% from about November 16, 2014 to December 16, 2014.[30] Alden Global Capital, a hedge fund, has profited from the decline in the ruble from early November 2014 until the present by holding financial instruments that increase in value as the ruble decreases in value relative to other currencies.[30]

Impact on former Soviet countries

Official exchange rates
Event Date USD to... Ref
Armenia AMD Belarus BYR Georgia (country) GEL
Start of Euromaidan Nov 21, 2013 403.82 9,332.29 1.6761 [31][32][33]
Annexation of Crimea Mar 18, 2014 415.46 9,842.75 1.7242 [34][35][36]
Central Bank intervention Dec 16, 2014 475.19 10,948.51 1.85 [37][38][36]

The devaluation of the ruble impacted the currencies of many post-Soviet states,[39] which are tied through trade and remittances by migrant workers in Russia.[40]

In Armenia, the dram depreciated from being traded at around 410-415 against the dollar in late November to a record high of 575 on December 16.[41] By mid-December inflation reached 15% to 20%.[42] Parliament Vice-Speaker admitted panic in the country.[43]

In Belarus, the ruble plummeted to its weakest since 1998 by December 15.[44]

In Georgia, the lari collapsed to its lowest level versus the dollar in more than a decade by December 5.[40] By December 11 the lari plunged from the pre-crisis average of 1.75 to the dollar to 1.92–1.98.[45]

See also

References

  1. ^ Ekaterina Shatalova (16 December 2014). "Russian Government to Meet on Financial Chaos as Ruble Dives 15%". Bloomberg. Retrieved 16 December 2014.
  2. ^ Ami Ginsburg (17 December 2014). "Russian financial crisis' effect on Israel to escalate". Haaretz. Retrieved 17 December 2014.
  3. ^ a b c d e Justin Lahart (16 December 2014). "Yield Seekers Prone to Russia's Disease". Wall Street Journal. Retrieved 16 December 2014.
  4. ^ a b c Mike Dorning and Ian Katz (16 December 2014). "U.S. Won't Ease Sanctions to Stem Russia's Economic Crisis". Bloomberg. Retrieved 16 December 2014.
  5. ^ Nicole Friedman (16 December 2014). "U.S. Oil Prices Snap Losing Streak". Wall Street Journal. Retrieved 16 December 2014.
  6. ^ a b Ksenia Galouchko and Natasha Doff (16 December 2014). "Russian Stocks Drop 12 Percent". Bloomberg. Retrieved 16 December 2014.
  7. ^ http://www.exchange-rates.org/Rate/USD/RUB/11-21-2013
  8. ^ http://www.exchange-rates.org/Rate/USD/RUB/03-18-2014
  9. ^ http://www.exchange-rates.org/Rate/USD/RUB/05-11-2014
  10. ^ http://www.exchange-rates.org/Rate/USD/RUB/06-01-2014
  11. ^ http://www.exchange-rates.org/Rate/USD/RUB/09-05-2014
  12. ^ http://www.exchange-rates.org/Rate/USD/RUB/11-02-2014
  13. ^ http://www.exchange-rates.org/Rate/USD/RUB/12-16-2014
  14. ^ Chiara Albanese and Ben Edwards (9 October 2014). "Russian Companies Clamor for Dollars to Repay Debt". Wall Street Journal. Retrieved 16 December 2014.
  15. ^ Sujata Rao (10 November 2014). "Falling rouble creates debt payment headache for Russian companies". Reuters. Retrieved 16 December 2014.
  16. ^ Официальные курсы валют на заданную дату, устанавливаемые ежедневно
  17. ^ "#BREAKING: Russia's central bank spent almost $2 bn to support ruble on Monday". Agence-France Presse. Twitter. December 2014. Retrieved 17 December 2014.
  18. ^ a b Olga Tanas and Anna Andrianova (16 December 2014). "Russia Defends Ruble With Biggest Rate Rise Since 1998". Bloomberg. Retrieved 16 December 2014.
  19. ^ a b Michael Birnbaum (16 December 2014). "Russia imposes steep interest rate hike as ruble plummets". Washington Post. Retrieved 16 December 2014.
  20. ^ MT Newswires (16 December 2014). "Midday Update: Stocks Reverse Course as Oil Stocks Offer Buying Opportunity, Ruble Recovers". NASDAQ. Retrieved 16 December 2014.
  21. ^ Обменники стали закупать пятизначные табло курсов валют Template:Ref-ru
  22. ^ Jack Farchy and Courtney Weaver (16 December 2014). "Russia's Steep Rate Increase Fails to Stem Ruble's Decline". Financial Times. Retrieved 16 December 2014.
  23. ^ a b Andrew E. Kramer (16 December 2014). "Russia's Steep Rate Increase Fails to Stem Ruble's Decline". New York Times. Retrieved 16 December 2014.
  24. ^ В барнаульских обменниках курс доллара приблизился к 100 рублям, евро — к 115 рублям
  25. ^ Идеальный валютный шторм накрыл Петербург
  26. ^ Курс евро в одном из филиалов банка в Туле достиг 150 рублей
  27. ^ a b Chiara Albanese and David Enrich (16 December 2014). "Western Banks Curtail Flow of Cash to Russian Entities". Wall Street Journal. Retrieved 16 December 2014.
  28. ^ "Russia may be excluded from MSCI emerging markets index — index provider". TASS. 17 December 2014. Retrieved 17 December 2014. {{cite web}}: Cite has empty unknown parameter: |1= (help)
  29. ^ Alexandra Scaggs (16 December 2014). "Markets Take Wild Ride on Ruble, Oil". Wall Street Journal. Retrieved 16 December 2014.
  30. ^ a b Vladimir Kuznetsov, Ksenia Galouchko and Ye Xie (16 December 2014). "Russia Crisis Hits Pimco Fund, Wipes Out Options". Bloomberg. Retrieved 16 December 2014.
  31. ^ http://www.exchange-rates.org/Rate/USD/AMD/11-21-2013
  32. ^ http://www.exchange-rates.org/Rate/USD/BYR/11-21-2013
  33. ^ http://www.freecurrencyrates.com/exchange-rate-history/USD-GEL/2013
  34. ^ http://www.exchange-rates.org/Rate/USD/AMD/03-18-2014
  35. ^ http://www.exchange-rates.org/Rate/USD/BYR/03-18-2014
  36. ^ a b http://www.freecurrencyrates.com/exchange-rate-history/USD-GEL/2014
  37. ^ http://www.exchange-rates.org/Rate/USD/AMD/12-16-2014
  38. ^ http://www.exchange-rates.org/Rate/USD/BYR/12-16-2014
  39. ^ Recknagel, Charles (12 December 2014). "Money Troubles: Russia's Weak Ruble Pulls Down Neighbors' Currencies". Radio Free Europe/Radio Liberty.
  40. ^ a b "Georgian and Armenian currencies collapse". Financial Times. 5 December 2014.
  41. ^ "Greenback's King Again: Armenian banks limit hard currency sales as dram plunges again". ArmeniaNow. 17 December 2014.
  42. ^ "Armenian dram's devaluation triggers 15-20% price hikes". arka.am. ARKA News Agency. 15 December 2014.
  43. ^ "Panic in Armenia natural – Eduard Sharmazanov". Tert.am. 17 December 2014.
  44. ^ "Former Soviet state currencies fall further". Financial Times. 15 December 2014.
  45. ^ Jvania, Tinatin (11 December 2014). "Georgian Officials Warn Against Panic as Currency Slides". Institute for War and Peace Reporting.
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