Based on the above article, the author states that "For budgeting, this favors the oil exporter, because a drop in oil revenues weakens the exporter’s economy—and consequently their currency". It makes sense that if oil prices are lower and traded based on USD values, it will hurt top line revenues for Russia since they produce oil. However, why does the second part of that statement have to be true? Why does the ruble depreciate against the USD?
The article as states "Since Russia sets its budget in rubles, not dollars, financing sources from foreign currencies are exceptionally strong relative to ruble". What does this mean for budgets to be finance in one currency vs another? Arnt all countries budgets in their own native currency? Why does this matter? What are the implications?
The Rouble depreciates against the US dollar because of demand and supply.
Think of it as a story that goes as follows:
a) In the ruble/dollar market, the supply of dollars consists of foreigners that have dollars and want to buy goods(oil and other things) and assets from Russia, while the demand for dollars consists of Russians that want to buy goods and assets from foreigners and need dollars to do so.
b) When the price of oil collapses 50%, then the foreigners only need to supply 50% as many dollars to buy all the oil they used to buy from Russia. So supply of dollars to the ruble/dollar market shrinks. When supply shrinks, prices increase. Imagine that as the Russians want to buy foreign goods, say medicine, and they will be willing to pay lots of Roubles to buy said medicine, so demand for dollars does not change as much as supply of dollars.
- Given relatively inelastic demand for oil, an decrease in prices would automatically decrease (at least nominal) exports. This could create deflationary expectations which in turn would translate into lower returns on ruble investments and depreciate the ruble.
- This is a direct consequence of 1. If the ruble depreciates and Russia's budget is set in rubles, the budget has effectively decreased, in foreign currency units.
Because Russia is a bigger exporter than the US, thus the oil price affects it more
Russia has external debt which becomes harder to pay as the ruble depreciates