Oil exchange rates RUB/EUR by Bank of Russia.

Oil crisis in RussiaIntroduction:Russia is one of the largest country in the world. It houses30% of the world’s natural resources. According to an estimate by the worldbank, the total value of Russia’s natural resources is 75 trillion dollars.

Theoil and gas sector contribute to 16% of GDP. It accounts for 52% in revenuewhereas 70% of total exports comes from Oil and Gas. Russia’s economic crisis2014-2017 was result of collapse of Russian ruble.

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The Russian stock marketdropped by 30% in December 2014.Following are the major causes for the financial crisis inRussia:1)     Fallin 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 economyis an export based economy, heavily reliant on oil and gas sector.

The Russian economyis dependent on the oil prices in the world to such an extent that it was saidthat 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 $60 per barrel inDecember 2014. The major cause for drop in the oil prices was caused by a dropin the demand for oil across the world, along with the increased production ofoil by US. The other major reason is supposed to be increased investments in productionlevels of oil in major oil exporting nations, whereas the demand didn’tincrease to the same extent. It is said that for Russia to have a balancedbudget, it needs an oil price to be 100$ for it to function smoothly.2)     Therewas huge outflow of foreign exchange from the country due to decline ininvestor’s confidence in the market.

This led to depreciation of Russian ruble.Following are the exchange rate fluctuation w.r.t. Officialexchange rates RUB/USD by Bank of Russia.

Officialexchange rates RUB/EUR by Bank of Russia.Impact:The Russian stock exchange fell by 30%. It was then that manypeople started to give up ruble in exchange of foreign currencies like USdollar and euro.Russian reserves on gold and foreign currencies were reduced toUS$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 andother low risk assets have decreased due to liquidity trap and quantitativeeasing. This led the investors from developed economy to buy assets fromemerging economies seeking greater returns. Which resulted in issuance of foreigncurrency-denominated bonds by Russian companies, the foreign currencydenominated debt increased from US$325billion at the end of 2007 to US$502billion.As the Russian ruble kept declining in comparison to USdollars and Euros, it increased the costs for the Russian companies to servicethe 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 Russiancompanies had to pay more of their ruble denominated currencies to pay offtheir debt.