The Russian ruble has been on a downward spiral against the US dollar so far in 2023, with a drop of more than 10%. In an official statement, the Russian central bank attributed the ruble’s drop to a temporary reduction in sales of foreign currency earnings by the country’s exporters. However, various news sources have argued that the drop has been due to reduced oil revenues and Western sanctions on Russia’s economy. The silver lining is that the central bank’s report anticipates the ruble’s downturn as temporary.
The ruble had ended 2022 as one of the world’s best-performing currencies. Therefore, it’s vital to take a deeper dive into what’s been causing the currency’s recent drop. One leading culprit could be reduced oil revenues. Russia is a top producer of oil, and their earnings from it are significant to their national GDP. The negative effects of the COVID-19 pandemic coupled with geopolitical factors have reduced the demand for oil in global markets, putting pressure on countries that depend on oil exports like Russia.
Geopolitical tensions have also been a thorn in the flesh for Russia’s economy. Western sanctions have been a significant source of turmoil, especially since the annexation of Crimea by Russia in 2014. Sanctions have affected Russia’s access to Western-made technology and financial markets, leading to a shift to develop their own technologies to become self-reliant.
In response, the Russian government has advocated for alternatives to the US-dominated financial system. Russia has also sought to diminish its reliance on the US dollar by establishing bilateral currency agreements with countries like China and India. Currently, the Chinese yuan accounts for 39% of overall volumes traded on the Russian forex market. Before that, Russians had bought Chinese currency valued at slightly over $143 million in the previous month. These developments indicate that Russians are looking for options beyond the US dollar, and the Chinese yuan is a front-runner in this shift.
Russia has traditionally considered the US dollar as a safe-haven currency, which acted as a source of stability during moments of economic turbulence. However, geopolitical tensions with the US over the last few years, coupled with Russia’s increasing hostility towards NATO member countries, have made the US dollar a less attractive option for Russia.
The shift towards the Chinese yuan could also be driven by China’s increasing economic and political influence worldwide. In recent years, China has been expanding its bilateral currency swap agreements with countries around the world, including Russia. These agreements generally allow countries to trade without using the US dollar as an intermediary currency. Instead, they can use their local currencies in exchange for goods and services.
The downward spiral of the ruble can also have impacts beyond Russia’s borders. As the ruble falls, it might lead to an increase in the price of oil, since Russia is a major oil producer. It’s also worth noting that the ruble’s depreciation has implications for companies importing goods and services from Russia. Importers could face increased prices for goods imported from Russia, leading to higher prices for end consumers.
In conclusion, while the Russian central bank’s announcement attributes the ruble’s most recent drop to temporary reasons, there are underlying factors at play. The Russian government has been seeking alternative financial systems and moving away from depending on the US dollar, including expanding its bilateral currency agreements with China. The behavior and developments of the ruble will continue to be of great interest in the international economic landscape.