The ruble is falling down and it can’t get up. Its latest slump was triggered by yet another steep drop in oil prices. That’s a problem for the Russian government which, as one of the world’s largest energy exporters, relies on oil and gas for roughly half its revenue.
To balance its budget, Russia needs to be able to sell oil for nearly three times the current market price. The government’s had to make drastic cuts in spending and their citizens are paying the price so financial leaders don’t have to exhaust the country’s reserves trying to balance the budget.
The Slide to Nowhere
This week the ruble continued its slide against the dollar, dropping four percent to eighty two rubles to the dollar, and it stands to lose even more ground. The strong dollar and crashing oil prices are crushing a number of emerging market countries in addition to Russia. Venezuela, Brazil and Mexico are all dealing with some degree of fiscal crisis related to low oil prices.
Putin – Everything is Awesome
One reason you won’t see any long lines of weary Russians at currency exchanges because they don’t have any money left to exchange. Roughly half of Russian families have no savings at all. That lack of demand has kept them from the kind of foreign exchange chaos we saw in Greece when that nation was thinking about ditching the European Union. Speaking at an international conference in Moscow, Putin claimed the business sector was stabilizing, but that was before the most recent unwinding of the ruble.
The Ukraine-Syria Connection
One thing Russia does have is a large and surprisingly effective army. But having dissatisfied people with large caliber weapons sitting around while the country’s on the verge of economic collapse is not a winning strategy for a top-down government. There’s some speculation their Ukrainian and Syrian military interventions were Putin giving the army something to do besides sit around and focus on how poor they are.
Still a Nuclear Power
It’s estimated Russia has something on the order of 7,500 nuclear warheads; 300 more than the United States and enough to kill everything on the planet. They also control one of the largest land masses on earth. It’s not in anyone’s interest for a country with a lot of spare nukes sitting around to be hard up for cash. It might be extremely tempting for the government, or elements within it, to quietly turn some of those loose nukes into much-needed cash; it wouldn’t be the first time their nuclear inventory came up short. Those calling for renewed sanctions should keep in mind that they could decide to sell warheads to a hot-tempered country like Iran and there’s little anyone could do to stop them. Kicking Russians when they’re down might not be a great idea.
With oil prices continuing to slide, the situation’s going to get worse before it gets better. If oil falls below twenty-five dollars a barrel, the ruble could be trading anywhere from eighty-two to eighty-five to the dollar. That’s pretty much going to be the last straw for Russians trying to buy foreign goods like iPhones and Mercedes sedans. Ironically, the reason the situation on the ground is not worse because the people are, by and large, already broke.
So far a worse crisis has been averted precisely because Russians aren’t trying to buy dollars or euros, which lets the government keep the exchange rate stable, at least for now. But everybody’s monitoring the situation carefully; nearly every newscast features updates on the exchange rate. Those of us in the U.S. would do well to remember that Russia isn’t Greece and a hungry bear is not a good neighbor.
Will Granderson is a regular columnist for Goldco Precious Metals writing on finance, precious metals, and gold as an investment and in popular culture.