Disclaimer: Past performance is not a guarantee of future returns. Fyggex does not provide any financial advice nor guidance, readers are required to make their own proper research prior to any financial decisions.
From the very beginning of the capitalist period, started in 1993, the Russian currency Ruble has been falling apart from the prosperous early decade of 2000. The Ruble has hit the lowest point ever in its modern history, a chain reaction that could be predicted to happen again. Why did those events happen, who were the winners back then, and should we as a observers learn anything from history?
The massive collapse of Russian Ruble started in 2013 and while it gained some value in climbing back, it has not been able to reach the 2012 heights since then. A significant number of articles have been published in more academic media to examine the matter. To save you the time, we aim to give you a short summary, so that you as a reader can understand what is at risk when considering Russian Ruble as an investment option.
The first meltdown: 1998 Nightmare
The year 1998 was, in reality, the first major catastrophe that struck the young capitalist nation of Russia after a long period of Soviet transformation. The capitalist system, the rule of law, democracy and the free market in one way or another could not have been in place properly, because by then the system had changed somewhat and then, unexpectedly, almost all investment gains had wiped out in a thunderstorm.
The Moscow Times published a postmortem analysis report 10 years later, and it was interesting to read how the price of oil hit as low as USD 10 per barrel in 1998. Why is that important? Russia (like Norway, Saudi Arabia, Venezuela and many other oil-rich countries) is heavily dependent on oil exports. The effect of oil prices has an effect on all nations that are inflating prices, and if it is weak, the chain reaction shuts down certain businesses that have nothing to do with oil at all.
In view of this, the 2008 global price of oil was at USD 115. As a result, the Russian currency Ruble went from 6 to the dollar to 21 at the beginning of September 1998, triggering significant bank failures and people losing all their pensions and savings. The 1998 shock had a halo impact on the global economy as Russia had become very integrated into global financial structures and trade.
When did Russian currency rise again? 12 years of happiness
Although investors and banks remained wary about returning to the carnage afterward, the Russian economy had again expanded by 10% in 2000, primarily with raise of domestic consumption for example rise in local restaurant activity.
In 2002, Russian stocks were rising and business started to roll again. Low currency value boosted both oil and weapons exports, international investors returned to the market and currency value increased. Admiral markets reported an 83% increase of the national GDP.
Knowing the swings of the Russian ruble, who would be so crazy to invest there at all? All major currency drops caused increased interest rates to attract back the capital. Russian central bank interest rate 2014 that was 23,8% at its highest. Greed never sleeps. Emerging market debt tends to offer better interest rates than saturated western economies, albeit with greater risks.
2013 Firestarter year for 2014. Short sellers dream?
Growth of the economy stagnated in the year 2013. There came two losers, the debt taker and the giver, since when the economy drops, everyone wants to get out the party and fast. The Ruble dropped over 250% lower against the US dollar. How is that even possible? Firstly, crude oil represented over 2/3 of the total exports and 50% Governments revenue. Global oil market is traded in US dollars. Secondly, Years of talk about modernization had not created sufficient impact. As a consequence of these two, any oil price shock would hurt Russian currency value directly, despite massive foreign currency funds they had gathered during the lucky years.
In 2014, the global price of crude oil fell by 50% in six months and the effect on Ruble was immediate.
Secondly, things got worse when Russia invaded Ukrainian Crimea peninsula. As a consequence, the EU and US gave Russia strict sanctions and trade limitations that are still in force today in 2020. All these international trade and economy limiting and punishing actions made Ruble weaker, and it meant that the country, companies and people had to pay more and more to pay off their USD based debts and interests.
Sanctions were met with counter sanctions cutting for instance foreign food imports. Inflation rose, as there was not enough production to meet the demand, while cheaper Ruble rate practically cut salaries and made debts in foreign currencies more expensive.
Currency drop list of losers?
While past performance is not a guarantee of the future returns, in the Russian case a past following has occurred. As the currency is worth less day by day, people rush to buy long lasting goods, such as washing machines, TV’s, furniture and jewelry. As well foreign currencies. These used to be considered as short-term winner segments.
Why is the oil price and currency drop bad for the businesses and employment? Simply when the money escapes from the stocks, investments and companies abroad, the only thing left is the state ownership. In 2016 approximately 60% of all productive assets were directly or indirectly in the hands of the Government.
At the same time volatility increases uncertainty of foreign companies and most firms stopped or radically reduced their presence in Russia. From Adidas shoes, Carlsberg beer to Apple. From Cars to IKEA (the latter appears to have 20% of the entire Russian furniture market).
If we provided above the list of usual suspects where the low oil price hits first, there is even a new earlier less affected sector now on decline. As Russia has imposed so called Yarovaya laws, trying to gain more control of the internet and mobile phone traffic. The prices and related services become rare and pricier.
Obviously major investment banks and smaller financial institutions alike stop offering loans, making it hard for foreign and also Russian companies to expand operations. Reverse is true when the currency declines, companies cannot afford to pay their costs which leads to mass lay-offs and closures. Prices rise, people have less work, debts default.
All major projects in the economy stop (such as house building, but also Governments modernization initiatives). Public sector, State owned companies and institutions relative influence grows. From the end of the society, Stock exchange short sellers enjoy their caviar and tax evasion increases for the wealthier class. On another hand physical foreign money collecting becomes everyday life for the poor, skyrocketing the uncontrolled grey economy on the grass root level.
Where are the opportunities emerging?
While Russia presently is more cut off from the world economy than 1998 and 2014, it has still considerable spill-over effect to the neighboring countries trading with Russia. This is especially true with those who were under the former Soviet rule. Economical Tsunami suggest that everyone should consider more stable trading partners, which leads to less trade and accelerates the vicious circle of misery.
In December 2018 there was a sight of hope when Saudi Arabia and Russia had constructive talks about oil production levels. Oil prices could increase, and pressure started to ease. That was a short-lived wishful thinking. The 2019 November Covid-19 crisis started from China and cut their oil demand at an accelerating speed, spreading fist to Asia and then to the rest of the world as we are witnessing today. To make things worse, Russia and Saudi Arabia ended up in a price dumping war, where Russia has unfortunately more to lose as explained above.
Currency trend speaks a clear language.
Picture source: https://tradingeconomics.com/russia/currency
The Moscow times reported 9th March Ruble being still worth 75 RUB to USD ratio. As contrast before 2014 Crimea invasion one USD was worth 36 Rubles. Russian companies and consumers have obvious interest to get valuable foreign currencies as they cannot trust the value of their own to remain stable.
What does all of this history mean today? When the price of oil goes back to USD 10, as some speculators now predict in 2020, will it take four years to get your money back? The world isn’t going to hurt as much as before, but things can get worse for the Russians themselves.
Naturally Russians want to decrease their USD dependency and pay in other currencies and use their own Rubles instead of the USD. On some occasions this new strategic direction has helped. China, for instance, has agreed to pay for Russian oil and gas in Russian Rubles.
It is also worth noting that during 2017 Russia invested worth 267 Million USD to Zimbabwe’s diamond industry to diversify their coffins from USD denominated currency funds.
Even if Russia would have no money to pay with and currency would fall, they could also use old-school Soviet time “barter trade”, exchange goods into State owned military sector companies that produced arms.
But the underlying question remains: Would you want to get your returns in a currency that is much less of its value tomorrow? The Ruble has dropped in value by 50% this decade. No wonder Russia is considering investigating crypto currencies, as Venezuela has already done.
Picture source: https://tradingeconomics.com/russia/currency