What's Happening To the Russian Ruble Amid Russia's Global Tension?

Why The Volatility Has Exploded in the RUB

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USD/RUB Daily Chart - Moving Higher Displays Russian Ruble Weakness. TradingView.com

 The summer of 2014 is ending with a handful of credible geopolitical risks. However, from an economic standpoint, there's one that's really gotten Wall Street's attention. The military escalation in Ukraine with Russia has led to economic sanctions by economic powerhouses like the United States, the Eurozone, United Kingdom, & more which are making economic ripple effects throughout the world and the Forex Market.

 

What Escalation? 

Throughout 2014, we've political and military escalation between the neighboring countries of Russia and Ukraine. Even recently, Russian President Vladimir Putin addressed pro-Russian rebels fighting in Ukraine where he called the fighters of "Novorossyia," or "New Russia." On the other side, Ukranian President Petro Poroshenko has said, "we are very close to the point of no return - a full-scale war."

This escalation is over Russian-speaking cities within far eastern Ukraine is over city posts and ports off the black sea. Whatever it is about, the aggressive approach has caused major economies to act against Russia economically and this article will tell you how it's playing out in the FX market regarding the Russian Ruble. 

Economic Sanctions Galore

So how have countries tried to let Russia know they don't approve? In short, they've imposed economic sanctions that block major economies and trade partners for doing business with Russia.

In today's global economy where every country is reliant on other counties for economic goals, this is a big deal and is having countries with economic exposure to Russia in trouble.  The sanctions have been so painful for Russia that their economy is already nearing recession amid the sanctions imposed.

 

The largest country with a global economic impact that is hurt by the economic sanctions is Germany.  Germany's stock market, the Deutsche Boerse Ag German Stock Index (DAX)  , has seen a major setback by falling when other markets like the S&P 500 is hitting all-time intra-day highs (chart shown below). 

As recently as Friday, August 29th, UK Prime Minister David Cameron called for European leaders to block Russia from the SWIFT banking transaction system.  Most all international money transfers are done via the SWIFT system and a block from this system could effectively bring Russia's global financial access to a halt.Of course, this would also hurt European businesses who need to be paid by Russians or need Russia's energy resources. As these types of sanctions escalate, it also hurts the value of the Russian Ruble. 

How The Ruble Has Recently Crumbled 

Below you can see the steady trend of the USD/RUB. Because the chart is rising, we can tell that the first currency of the pair, the US Dollar is strengthening as the second currency in the pair, the Russian Ruble is weakening. This trend is developing thanks to two forces. 

First, the reasons above show that Russian's economy is suffering due to the sanctions being imposed from other countries.

Because many global leaders feel that this issue could be escalating, the current assumption is that Russia will press on and suffer the sanctions in order to achieve their goals. 

Secondly, this is happening at a time when the Federal Reserve is winding down their quantitative easing program and are discussing how they will raise interest rates.  When a central bank raises interest rates, their currency often strengthens as money flows into that country due to higher yielding bonds. 

These two components, Russia's economic sanctions and the Federal Reserve ending their USD-weakening quantitative easing program, could put the USD/RUB trend on a steady track higher. 

An Update in 2016

 

The Russian Ruble was in many ways the victim of geopolitical shock and a commodity crisis at the same time. This led to in your freefall in the Ruble and caused some currency strategist to make comparisons to potential replay of 1998 when Russia defaulted on their debt.

Few believed such an event would happen at the time as was evidenced by the large exposure of famous hedge fund long-term capital management or LTCM that had to shut down once news of the default hit the wires.

As military escalations have cooled down and oil prices have ramped back up from the lows in Q1 2016, the Russian Ruble has been one of the top performing currencies in the emerging market complex. If the new narrative in the US dollar continues its scope, the impressive returns could continue throughout the year.

Continue to keep an eye in the direction of the US dollar as well as the oil market and potential geopolitical tensions. These three factors have gone a long way in helping traders understand what to expect from the Ruble.