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The Goal of Sanctions Shouldn't Be to Wreck Russia's Economy

December 17, 2014 in Economics

By Emma Ashford

Emma Ashford

In the course of 24 hours, the ruble dropped more than 10% against the dollar. This sudden collapse comes on the heels of a six-month period in which the ruble has lost 55% of its value. Unsurprisingly, many of the resulting headlines are self-congratulatory, describing a Western victory over Russia. But the collapse of the ruble owes far more to other factors — primarily the dramatic drop in the price of oil — than it does to sanctions, and may not help to solve the Ukraine crisis.

Although the ruble has been floundering for some time, the last two days have seen a sharp and unexpected drop in the Russian currency. The ruble has fallen over 20% against the dollar in the last month, but 11% of this drop occurred within in a single day. Following a 1am emergency meeting early morning Tuesday, the Russian Central Bank raised interest rates dramatically (from 10.5% to 17%) in an attempt to halt the ruble’s slide. Despite this, the ruble continued to fall until around 4pm Moscow time, and has since stabilized at around 70 rubles to the dollar.

The ruble crisis is largely the result of falling oil prices on an economy that is almost entirely dependent on oil and gas exports. Sixty-eight percent of all Russian exports are natural resources, with crude oil alone making up 33% of Russian exports. The Russian government is heavily dependent on revenues from oil and gas, with the Russian budgetfor 2015 assuming oil prices of $100/barrel. With oil now trading at below $60 per barrel, Russia will have to dig deep into its reserve fund to finance government spending. OPEC’s public announcement of their intention to maintain production levels means that the price of oil is unlikely to go up any time soon. Similar crises are entirely possible in other oil-dependent states such as Venezuela or Nigeria.

The ruble crisis is largely the result of falling oil prices on an economy that is almost entirely dependent on oil and gas exports.

In the Russian case, sanctions have certainly worsened the crisis. In particular, they have succeeded in cutting off foreign financing to many Russian companies, making it more difficult for them to obtain loans to tide them through difficult periods. Indeed, part of the currency panic yesterday appears to have resulted from the Russian Central Bank’sinvolvement in a massive 625 billion ruble bond issuance by oil …read more

Source: OP-EDS

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