Russian Currency Collapses Overnight

The Russian Ruble has taken a turn for the worst as an overnight move by the Russian central bank increased mistrust of the entity and the buying power of the Russian currency. America may feel the pinch before long.

At 1:00am in Moscow, the Russian Central Bank increased interest rates from 10.5% to 17% – a 650 basis point move in moments. That move sent the Ruble into free-fall.

Upon the banking move, the currency went from about $58 dollars per ruble to a low of $79.66 per Ruble.

The Ruble has been steadily declining in value since late summer due to the crude oil glut and ensuing price decreases engineered by OPEC.

Russia is not a heavy manufacturing or intellectual property production nation. It’s gross domestic product comes almost entirely from commodities – oil and precious metals making up a huge part.

As oil declines, so does the ability of the Russian economy to grow. For each $10 drop in the price of crude, Russia loses approximately .8% of GDP. The price of oil has dropped from a high of about $110 to a current value of about $56 which could equate to an almost 5% loss of GDP.

Adding to headwinds, Vladimir Putin’s incursions into Ukraine have brought on international sanctions that make it nearly impossible for Russian businesses to roll-over their Euro and Dollar-denominated debt which could cause a huge number of defaults over the next 12-18 months.

The effects on the American economy may be soon to follow.

Russian oil drillers earn dollars for the oil exports, but spend locally in the Russian currency. That hedges their production budgets against falling crude prices. Unlike America, where producers earn and pay in the same currency.

Because of the currency move, it could be advantageous for Russia to increase production to enhance revenues and tax receipts. This would increase the supply of cheap oil and push crude prices below $45. American shale oil producers will feel the brunt of cheap oil.