Why is the rouble collapsing?

Question

What are the reasons why the rouble (RUB) is collapsing? Which one is the main one?

Answer 1

The answer is very clear when you look at Russia's monetary statistics. The Central Bank of the Russian Federation has a very good site, and you can see them here:

Russian Money Supply (M2)

or courtesy of the St. Louis Federal Reserve:

They provide the annual expansion rate which is nice. Historically, Russia's money supply has always been an extreme outlier compared to other European countries. Compared to the USA's money supply, which roughly doubles every 10 years, Germany which was down at 1.3x/decade last time I checked, Russia's typically increases by 20x a decade.

The open research question is why currencies tend to collapse suddenly, rather than over time, but the underlying reason is always found in their relative expansion rates. I would suspect that this particular episode has also been triggered by the recent drop in oil prices, since that will put additional pressure on oil exporters like Russia, due to the drop in income from exports.

Answer 2

The primary source of the recent ruble collapse has almost certainly been the falling international oil price, aggravated by some other features of Russian politics and its economy.

Petroleum products account for over half of Russia's export revenue, and most remaining export revenue comes from other commodities, whose output it cannot easily adjust. When oil prices fall, this lost export revenue must be replaced by some combination of

(1) more (presumably non-oil) exports

(2) fewer imports

(3) a larger net capital inflow.

For the most part, these adjustments will be made in response to an equilbrating decline in Russia's exchange rate. Since Russia's export mix is so commodity-heavy, the short run response of (1) to the exchange rate is very weak; since consumers tend to be sluggish in responding to price changes, (2) is weak in the short run as well. For a modern economy with good access to international capital markets, (3) is the main short-term buffer for shocks like these, but Russia is currently suffering from Western sanctions and was not particularly well-integrated into international capital markets in the first place.

For all these reasons, a very large decline in the exchange rate is needed to induce enough of (1), (2), and (3) to offset the decline in oil export revenue. Meanwhile, skittishness about the political situation in Russia (and its dubious historical record on monetary stability) don't help.

By the way, the dependence of commodity exporters' exchange rates on commodity prices is a staple of international finance; it has even been used to forecast commodity prices.

Answer 3

The answer by nominally rigid very correctly hints at oil prices as one of the major causes. I'd add more details and numbers to this point. A slightly longer version is available here.

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1. Russian corporations borrowed in foreign currency when external debt was cheaper than domestic debt

Paul Krugman pointed at the PPP vs exchange rate changes. I've made a similar plot for absolute values of PPP:

External debt was cheaper than domestic one until high oil prices supported the ruble. A corporation paid 12-18% annually for ruble-denominated debt and a fraction of this interest for dollar-denominated debt. So, corporations thought it was a good idea to borrow abroad.

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2. Russian corporations had to pay this debt under financial sanctions and declining oil prices

That is, a shortage of foreign currency when private corporations must paid their debts by the end of 2014:

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3. The Russian Central Bank refused to support the ruble when Russian corporations needed dollars

The Central Bank held more than half of the balance-of-payment surplus accumulated over 2000-2008, but it marketed only about $100 bn. when multiple factors basically halted the currency influx and someone at home had to put dollars on the table:

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Finally, when the exchange rates hiked in December, even debt-free entities started buying foreign currency

Apart from borrowers that sought some $50 bn. for foreign creditors, the market was full of those who tried to buy dollars because exchange rate speculations yielded up to 10% daily. The ruble went into freefall: