Oil exchange rates RUB/EUR by Bank of Russia.

Oil crisis in Russia

Introduction:

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Russia is one of the largest country in the world. It houses
30% of the world’s natural resources. According to an estimate by the world
bank, the total value of Russia’s natural resources is 75 trillion dollars. The
oil and gas sector contribute to 16% of GDP. It accounts for 52% in revenue
whereas 70% of total exports comes from Oil and Gas. Russia’s economic crisis
2014-2017 was result of collapse of Russian ruble. The Russian stock market
dropped by 30% in December 2014.

Following are the major causes for the financial crisis in
Russia:

1)     
Fall
in oil prices: With the rapid increase in production of shale oil by America,
the prices of crude oil started to fall in world market. Since, Russian economy
is an export based economy, heavily reliant on oil and gas sector. The Russian economy
is dependent on the oil prices in the world to such an extent that it was said
that for every 1$ decline in crude oil prices Russian economy lost billions of dollars.
The price of oil fell from $100 per barrel in June 2014 to $60 per barrel in
December 2014. The major cause for drop in the oil prices was caused by a drop
in the demand for oil across the world, along with the increased production of
oil by US. The other major reason is supposed to be increased investments in production
levels of oil in major oil exporting nations, whereas the demand didn’t
increase to the same extent. It is said that for Russia to have a balanced
budget, it needs an oil price to be 100$ for it to function smoothly.

2)     
There
was huge outflow of foreign exchange from the country due to decline in
investor’s confidence in the market. This led to depreciation of Russian ruble.
Following are the exchange rate fluctuation w.r.t.

Official
exchange rates RUB/USD by Bank of Russia.

Official
exchange rates RUB/EUR by Bank of Russia.

Impact:

The Russian stock exchange fell by 30%. It was then that many
people started to give up ruble in exchange of foreign currencies like US
dollar and euro.

Russian reserves on gold and foreign currencies were reduced to
US$385 billion as compared to US$510 billion at the start of the year in 2014.

Russian monetary policy.

After global economic crisis, the yield on U S treasuries and
other low risk assets have decreased due to liquidity trap and quantitative
easing. This led the investors from developed economy to buy assets from
emerging economies seeking greater returns. Which resulted in issuance of foreign
currency-denominated bonds by Russian companies, the foreign currency
denominated debt increased from US$325billion at the end of 2007 to US$502
billion.

As the Russian ruble kept declining in comparison to US
dollars and Euros, it increased the costs for the Russian companies to service
the debts which were issued in US dollars or other foreign currencies. For ex,
the ruble depreciated by 50% in 2016 as compared to 2014, which means Russian
companies had to pay more of their ruble denominated currencies to pay off
their debt.

 

 

 

 

 

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