Silver Lining in the Ruble’s Collapse

Considering how the Russian ruble seemingly collapsed overnight-dropping to near half its value before recovering recently, it would be very tempting to conclude that Russia’s economy will be on the ropes for a long time to come. Russia’s economy hasn’t experienced this type of nasty currency shock since 1991 with the breakup of the Soviet Union and the beginning of the turbulent Boris Yeltsin years. Russia’s critics might just be congratulating themselves as the EU sanctions over Russia’s Ukraine and Crimea policies combined with the global meltdown in petroleum prices to produce harsh financial pressure on Russia. After all, Russia’s economy is skewed heavily towards its key export products: oil and natural gas. Well, before one thinks the Russian bear is going to be on its knees for good, we need to look at the larger macro-economic figures. We have to look 5, 10, even 20 years down the road. Viewed from this perspective, Russia is actually coming out ahead. Far from a second-rate Second World power with faded memories of global superpower status, it appears Russia has better long term financial prospects than, you guessed it, the USA.

 

First, the ruble’s near-term decline means Russia’s oil production costs just got cheaper. Remember that Russia is a direct producer of oil and natural gas unlike Saudi Arabia and other countries where multinationals do the extraction. Russia then turns around and sells the oil it produces for hard currencies. Based on this reality, Russia isn’t losing out. In fact, it’s production costs tanked due to the ruble and this provides shelter from the decrease of the price of oil. In terms of economic fundamentals, as outlined in Martin Katusa’s ‘Colder War,’ Russia has a lot to lean back on despite the near term recession and financial pain the ruble and oil’s collapse will bring. First, Russia has an annual $200 billion trade surplus, over $400 billion in reserve currency, and has stepped up its gold reserves. Compared to the US, Russia has a much more favorable debt-to-GDP ratio. On many economic indices, Russia is on a better footing than the US. Depending on how long oil prices will stay depressed, Russia has the fundamentals to weather out its economic storms.