Oil Prices or Sanctions? What is Driving the Plunge of the Ruble?
What is driving the spectacular plunge of the ruble? Some say oil prices, some say sanctions, some say both. Let’s take a look at some charts.
Here is one that shows the exchange rate of the ruble against the price of oil. For the exchange rate, we use the real effective exchange rate—a broad measure that shows the exchange rate of the ruble averaged against the currencies of all of its trading partners and adjusted for inflation. For oil prices, we use the Brent crude benchmark, converted to constant 2014 US dollars.
Pretty good fit, huh? If you do the stats, it turns out that the coefficient of correlation is 90 percent. Affirms what we all knew: Russia is a petro state. The oil price drives everything else.
So what about sanctions? Have they made any difference at all? Here’s another chart that is, if not conclusive, at least suggestive. This one shows the amount by which the ruble is over-valued or under-valued relative to what we would expect based on oil prices alone.
The first Western sanctions were imposed in March and April of 2014, but they were limited to a few of Putin’s cronies and had little effect on the broader economy. As you can see, the ruble actually gained ground from March to July, while oil prices held steady. In July, more serious sanctions were imposed on some big Russian corporations and banks. About that time the oil price started to slide, but the chart takes that into account. What it shows is that from July to December, the ruble fell about 15% more than the oil price alone would have predicted.
But a word of caution: Not much time has passed, and the December data are still preliminary. Some of the December drop may have been speculative overshooting rather than impact of sanctions. In fact, as I write this, the ruble has bounced back to 54 to the dollar, up from its low of 80, touched briefly on December 16.
Let’s see what develops in the new year. I’ll post an update to these charts when more data comes in. Let’s hope that economic adversity distracts Putin from his geopolitical adventurism of this past year. If not, the Russian recession of 2015 could get really nasty.
For a more detailed discussion of the plunge of the ruble, check out this story on Ed Dolan’s Econ Blog.