Ruble floats, Oil prices fall, China comes to the Rescue?

Russia’s economic prognoses for 2014 were not excellent to begin with, and the uncertainty of the country’s geopolitical direction since the onset of the Ukraine crisis, coupled with Western sanctions, have consistently rattled the Russian economy. The Ruble has lost over 25% of its value against the US Dollar since February, capital flight has increased, and tit-for-tat sanctions have hurt Russia’s economic fortunes. Alarmingly, the drastic fall in oil prices has created a fiscal problem for Russia: its 2015 budget rests on the premise of oil pricing around $100 per barrel – it is currently less than $80. President Vladimir Putin warned that the outstanding fall in the price of oil could cause production to “collapse”.  On top of that, at the latest G-20 Summit in Brisbane, Australia, President Putin received the diplomatic cold shoulder from many Western leaders because of the deterioration of the Minsk Ceasefire in eastern Ukraine. The economic downturn of Russia following the Ukraine crisis has repeatedly posed the question: to what price can Russia exercise an independent foreign policy?

Until recently, the Russian Central Bank had been aggressively intervening in the Foreign Exchange Market to arrest the currency’s fall in value. The Central Bank counted on almost $500 billion worth of foreign currency reserves which it was using to purchase and prop-up the ruble. Nonetheless, the currency failed to beat the depreciating trend, as Western sanctions continued with no sign of avail. On November 5th, the Russian Central Bank increased the ruble’s interest rate to 9.5%, from 8%, making it more attractive to world markets to combat the rise in inflation. However, the Central Bank’s announcement that it would let the currency float – meaning it would stop intervening in the Foreign Exchange Market – and reserve the right to future intervention was well received, as the ruble bounced back up against the dollar. This act was a recognition that Russia could not continue to support a fixed exchange rate regime vis-à-vis the euro and the dollar; a testament to how the geopolitical situation in Ukraine has unsettled the Russian economy.

Oil prices have fallen to their lowest in four years, presenting a threat to Russian economic stability which depends greatly on its energy exports. OPEC countries are supposed to meet in Vienna in the coming days to discuss whether to cut production to raise prices. Most analysts believe that this is unlikely, believing that OPEC will only intervene if the price of oil drops to $70 a barrel. As mentioned before, this presents a fiasco for Russia, who’s most profitable exports are oil and natural gas. Some observers have noted that the fall in oil production was a factor in the economic collapse of the Soviet Union – which also relied on oil exports for its prosperity – and that it should be welcomed once more to stop Russian aggression. The argument goes: a fall in oil prices is a result of the stabilization of the US dollar, and the strengthening of the dollar will cause the price of oil to resemble its “real” price, much to the misfortune of oil-states who will suffer. Despite these eerie warnings, Russia’s Central Bank head, Elvira Nabilliuna, believes that the Russian ruble can stave off the fall in oil prices and strengthen once again.

In light of all these difficulties, Russia has been reassessing its strategic outlook with regard to its energy resources. The big news has been the recent deal with China to sell Siberian gas – adding on to the signature $400bn agreement from May. If this trend continues, China may be positioning itself to become Russia’s premier importer of oil and natural gas, replacing Europe. The geopolitical strategy is palpable: Europe has demonstrated that it is unwilling to keep silent over Russia’s muscular foreign policy in exchange for natural gas, and has joined the United States in sanctioning the country, stumping its economic forecasts for 2015. Conversely, China has been much less avid to criticize Russia over the Ukraine crisis, and has been taking all the steps to deepen ties between the two countries. The synchronization of China and Russia’s energy cooperation might produce a situation where Russia can exercise an independent foreign policy and not risk crashing its currency and economy as a result of Western opposition.