Financial and Monetary Systems

Understanding Russia’s currency troubles

Adrian Monck
Managing Director, World Economic Forum Geneva
Share:
Our Impact
What's the World Economic Forum doing to accelerate action on Financial and Monetary Systems?
The Big Picture
Explore and monitor how Banking and Capital Markets is affecting economies, industries and global issues
A hand holding a looking glass by a lake
Crowdsource Innovation
Get involved with our crowdsourced digital platform to deliver impact at scale
Stay up to date:

Banking and Capital Markets

How do we understand the sudden collapse of the Russian ruble? The trigger, explained by Leonid Bershidsky, appears to have been a massive bond issue on 12 December 2014.

Russia’s state-owned oil company, Rosneft, raised 625 billion rubles ($10.8 billion at that day’s exchange rate) with a bond issue that had a lower yield than Russian government bonds of similar maturity.

Russia’s Central Bank agreed to accept the bonds as collateral, so any banks buying these bonds could borrow against them. (Rosneft denies any role in the crisis.)

But why is Russia so vulnerable? One answer came from Paul Krugman, who has studied currency crises since 1979:

[Russia] has, after all, run large current surpluses over time; overall, it’s a creditor, not a debtor nation. But there are a lot of external debts all the same, reflecting private sector borrowing — and foreign currency reserves are dropping fast in part thanks to private capital flight.

What this reminds me of was one of the corners of the 1980s Latin American debt crisis, which preoccupied me during my year in Washington back in 1982-3. Venezuela then, like Russia now, was a petro-economy which had consistently run external surpluses. But it was nonetheless a vulnerable debtor, because all those external surpluses and more had in effect been recycled into overseas assets…

Krugman sees this as a classic emerging market currency crisis:

When you have big balance-sheet problems involving foreign-currency debt, an interest-rate hike that tries to discourage capital flight damages the economy, and hence those same balance sheets, from another direction, and it’s common, even standard, for the effort to fail.

For those arguing that the collapse in the oil price is broadly beneficial, Russia’s plight is a counterpoint. As Gavyn Davies writes in the FT:

If there is a really dark side to this oil shock, it is likely to stem not from the developed economies, but from its destabilising effects on Russia…and some other oil producers in the emerging world. That is what transpired, eventually, in the oil shock of 1997/98.

A collapse of the Russian economy, with its dangerous political consequences, is the most important reason to worry that the “idiotic optimists” will be wrong about the beneficial market impact of the 2014 oil shock.

 

Don't miss any update on this topic

Create a free account and access your personalized content collection with our latest publications and analyses.

Sign up for free

License and Republishing

World Economic Forum articles may be republished in accordance with the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Public License, and in accordance with our Terms of Use.

The views expressed in this article are those of the author alone and not the World Economic Forum.

Share:
World Economic Forum logo
Global Agenda

The Agenda Weekly

A weekly update of the most important issues driving the global agenda

Subscribe today

You can unsubscribe at any time using the link in our emails. For more details, review our privacy policy.

What just happened at the IMF and World Bank Spring Meetings?

Kate Whiting

April 23, 2024

About Us

Events

Media

Partners & Members

  • Join Us

Language Editions

Privacy Policy & Terms of Service

© 2024 World Economic Forum