What Caused the Russian Ruble Crisis?

Russia's Ruble Crisis and Its Implications

Five Thousand Ruble Notes
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The Russian economy was the eighth largest in the world by nominal gross domestic product (“GDP”) valued at $2.1 trillion in 2013. Between 2000 and 2012, the country experienced rapid growth in its economy, driven by higher energy prices and increased arms exports. International investors were confident that Russia was turning a corner and foreign direct investment was flowing into the country.

A year later, Russia’s economy was on the brink of a crisis with the ruble falling to record lows against currencies like the U.S. dollar. The Russian central bank’s decision to hike interest rates by a massive 6.5% failed to stem the tide as investors have lost confidence in the currency. While the currency recovered to some extent in 2016, it still hadn't regained its prior strength moving into 2017.

Falling Oil Prices

Russia’s economy has always been dependent on the price of crude oil and natural gas, since the commodities account for a significant portion of the economy. In 2013, exports of crude oil and related products accounted for more than two-thirds of the country’s total exports and more than half of the government’s total revenue, meaning that lower prices could have a huge impact on the economy.

In 2014, crude oil prices fell by around 50% due to lower demand in Europe – Russia’s key market – and increased production in the U.S. The biggest catalyst behind Russia’s problems, however, was probably when OPEC indicated that it would not cut its production to boost prices in late-2014. While the organization eventually cut production, crude oil prices still haven't recovered to their highs.

Crude oil prices are likely to remain depressed for the foreseeable future. OPEC compliance is less than 50 percent by many accounts if you exclude Kuwait and Saudi Arabia, who cannot be responsible for maintaining cuts on their own. U.S. shale production has proven to be flexible in response to falling crude oil prices, as production levels have continued to recover moving into 2017.

Political Risks

Russia’s second problem relates to its foreign policy. After invading Ukraine back in late-February 2014, the U.S. and E.U. imposed a number of financial sanctions that have made it difficult for Russian firms to borrow abroad. These sanctions were intensified after the country's alleged interference in U.S. and European presidential elections in 2016 and 2017.

President Vladimir Putin has openly admitted that these economic sanctions are severely harming the economy. Over the long term, there are signs that these sanctions may be discouraging families from having more children, which could have devastating long-term effects. For most of 2017, there have been 10 percent to 15 fewer births, according to Foreign Policy.

Dollar Debt

The third big problem deals with Russia’s U.S. dollar denominated debt. With holdings of about $11 billion in ruble-denominated debt and $60 billion in dollar-denominated debt, the country could end up paying quite a bit more in rubles to pay off its debt in U.S. dollars. After selling $6 billion in dollar-denominated debt in June 2017, the country's dollar debts are set to significantly increase.

Several credit agencies cut the country's credit rating to junk status following the Ukraine crisis and a subsequent two-year recession. The lack of confidence in the ruble on the streets of Russia could further exacerbate the crisis as the demand for U.S. dollars increases from both the country’s own residents and investors demanding payment on their bonds over the long-term.

Moving Forward

Russia successfully emerged from a two-year recession in 2016, but the country's economic crisis remains. There's a high chance of another near-term recession moving into 2017 and structural reforms are needed to avoid future problems. For example, some experts suggest shifting investment from natural resources to infrastructure and human capital could put the country on a better course.

Despite these investment needs, Russia's Financial Ministry spent half of the country's Reserve Fund to pay debts and fulfill budget commitments in December 2016. The fund has fallen from $50 billion at the beginning of 2015 to just $16 billion by early 2016. The World Bank and other institutions have warned that these trends could have an adverse effect on the government's ability to provide for its citizens.


The Russian ruble crisis had many different causes that contributed to the sudden crisis of confidence, including falling energy prices, heightened geopolitical risks, and increasing demand for U.S. dollars. With the ruble still trading near its lows with the U.S. dollar in 2017, the country continues to suffer from these same problems that caused the crisis and could eventually cause the next crisis.

International investors may want to take caution when investing in Russia given the ruble crisis and its aftermath. Dollar denominated debt could become difficult to service in rubles, while equities could suffer thanks to deteriorating spending power among consumers and businesses. These trends could eventually lead to a similar crisis or recession down the road.