Economic warfare and ruble exchange rate fluctuations

© RIA Novosti / Vladimir Sergeev

Russian ruble exchange rate changes have all the ingredients of success detective story. On Monday, 15.12. 2014 ruble weakened to a record low since 1998: the dollar cost 64 rubles and 79 rubles to the euro. In recent years, the price of an euro has been hanging around 50 rubles, or 5 000 rubles withdrawn from an ATM for a night of adventures in St. Petersburg would cost around 100 euros.

Last night, the Russian Central Bank raised its base rate drastically from 10.5 per cent to 17 per cent to curb currency speculation. The price of an euro during the day momentarily exceeded the limit of 100 rubles or 80 rubles for a dollar. Now at the end of the market day the ruble has slightly appreciated: $ 1= 72.60 rubles and 1 euro = 90 rubles. The official rates of the Russian Central Bank before tomorrow's market day are $ 1 = 61.15 rubles and 1 Euro = 76.15 rubles

What is this about?

The economic sanctions imposed by the US and the EU prevent granting of loans to Russian companies with a payment period of more than 30 days. As Russian companies have been borrowing money from the West the entire post-Cold War period at a lower rate of interest and the penalties now prevent loan restructuring and follow-up funding, these companies must now get euros and dollars to take care of their loans, thereby creating more demand for foreign currency in the Russian market and thus weakening the ruble.

Also, the fall in the price of oil reduces Russia's foreign exchange earnings, which in a situation of high demand for currency weakens the ruble.

The Eurasian Economic Union comes into force on January 1, 2015. Most likely at the same time the Russian ruble and foreign exchange markets will change drastically, and the Russian economy will take a distance to the dollar and the euro. Now the West is doing its best to weaken the ruble and thus destabilize the Russian economy and the political system before the end of the year. The maxima of the West is to prevent the emergence of the new economic union and closer cooperation within the BRICS. Taking into account the Christmas holidays, the West has little more than a week to succeed.

What are the Russian authorities doing? Trying their best to defend the ruble and the Russian economy. Their actions are limited by two factors: first, in this battle Russia's foreign currency reserves may be used only minimally (for which there are far better uses), and, secondly, the entire process must take place under the rules of the dollar-based global liberal economic model (because Russia will disconnect from the dollar system only later).

For the rest of the year the going will only get tougher. Even under the liberal economic model the Central Bank of Russia and the government have much stronger measures to stabilize and strengthen the ruble, which they probably will introduced as needed.

Russia will detach itself from the global dollar economy according to earlier plans .Until then it will continue defending the ruble. The West on its part will make every effort to weaken the ruble. What will be the end result? Time will tell - or the stars. I predict that next year will see a surprise!

What might this 2015 surprise be?

The Russian government has already informed Russian banks that the amounts of reserve currency deposits placed by various ministries in Russian banks will be drastically less than during previous years. These funds will instead be used to finance various domestic infrastructure projects. All this means that the Russian government obsessed with saving during all the 2000s and 2010s will become a big spender investing in strategical domestic projects. This will considerably strengthen Russian economy.

Another factor will be the Eurasian Union.

The third factor is a combination of recent Russia-China, Russia-Iran and Russia-India megaprojects and financing from the New Development Bank NDB (formerly referred to as the BRICS Development Bank). Russian President, Government and Bank of Russia have consistently informed the market players that now is the time to concentrate on domestic markets and domestic financial resources. All this will probably mean the unlinking of Russian economy from dollar-dominated Western economy.

Enjoy the cliffhanger!

Comment: And it seems that it's not just the Russian currency that is being hit.

Most worryingly, Russia's problems are starting to spread. Ukraine has been in deep trouble all year and it is now teetering on the edge of collapse; its hard currency reserves dipped below $10bn earlier this month, or about 1.3 months' of import cover. The hryvna is down by some 40% since the start of the year and the only thing holding it up now is the promise of more international bailout money in the new year.

Kazakhstan devalued the tenge in February by 18%, but all the wiggle room it created has now been used up. Fears of another devaluation are mounting fast, as Kazakhstan's economy remains closely tied to Russia's as well as being a major oil exporter.

The falling currencies are no longer just hitting countries that are tied to Russia and the contagion is spreading out, leading some to start talking about a repeat of 1998 when oil prices fell to $10. Last week the Turkish lira sank to its lowest levels against the dollar for a year, despite the fact it is one of the big winners from falling oil prices, as it is heavily dependent on oil and gas imports. Likewise, China, another major energy importer. has watched its currency fall by 26% since May, and 7% since the end of October alone.

Collapsing currencies around the world, coupled with the "death spiral" of selling in the oil markets, is sparking worries that we are coming to the point where things could spin out of control - and not just for Russia.

See also: Economic warfare: The U.S. Empire of "Frack" versus Russia

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