Battered Russian ruble plunges amid oil price drops

Doug Stanglin | USA TODAY

The beleaguered Russian ruble has plummeted to its lowest point in a year, hit hard by the persistent low price of oil exports and a Russian economy squeezed by Western economic sanctions.

The national currency dropped to 73.2 to the dollar on Wednesday, the last day of trading for the year. It is down 20% compared to a year ago.

The ruble's troubles reflect a grim economic picture in a country heavily dependent on oil exports: the economy contracted an estimated 3.7% in 2015, inflation is running at 15%, and inflation-adjusted wages are down 9.2% from 2014. In addition, the economy continues to be saddled with structural problems, including low-productivity and monopolization of key industry.

“We cannot say the peak of our problems has passed,” Alexei Kudrin, a former finance minister, said in an interview with Interfax, the Tass News Agency reported. “Today we see some further deterioration.”

The troubling year-end picture, and plunge in oil prices to $37 a barrel, have prompted government officials to drop their argument that the economic squeeze is only temporary, said Vadim Grishin, a senior adviser at the International Monetary Fund and a former economic adviser to the Russian government.

"These stories have now stopped," Grishin said. "They have accepted the reality, which may be the major change."

Grishin said there have been other sharp falls in the ruble, notably in 2008, but the currency quickly rebounded with soaring oil prices. Not this time, he said. "We can expect that it would be a long term trend."

The falling ruble means Russians who want to vacation in popular tourist spots, say, in Thailand or Rome, no longer have that luxury. Instead, if they are lucky, they can go to Armenia or Georgia, where costs are more economical.

"It has dramatically limited the possibility of people to go abroad, or for vacation in general," Grishin said. "Even standard (domestic) tourist spots like Sochi are now too expensive for many Russian travelers."

Even a short trip to nearby Turkey is no longer possible because Russia blocked tourism and trade with Turkey after it shot down a Russian warplane that it said had strayed over from Syria and violated Turkish airspace.

Also nagging at the Russian economy are economic sanctions imposed by the West following Moscow's 2014 incursion into Ukraine and its annexation of Crimea in what Western nations deemed an aggressive and illegal move.

While the United States and Russia continue to cooperate in some areas, notably the nuclear deal with Iran, relations remain frosty. The U.S. sanctions have imposed asset freezes and travel bans on more than 100 Russians, mostly cronies of President Vladimir Putin, and the European Union has targeted nearly 100 more, noted Foreign Affairs.

The sanctions have not only frozen financial relations in many sectors, they also have undercut investment. The International Monetary Fund has forecast that the flight of funds from Russia in 2015 could amount to $100 billion.

The isolation of Russia is "disastrous for the country and its human capital" and the trend needs to change for cooperation, head of VTB 24 Mikhail Zadornov said Monday in an interview with Rossiya 24 TV channel, the Tass news agency reported. VTB 24 is a subsidiary of the VTB Group, in which the Russian government is the majority stockholder.

"Isolation leads to the fact that we do not get the influx of capital, technologies, new knowledge, and are losing positions in global competition, which is definitely in progress," Zadornov said, adding that "continuing down that line would be absolutely disastrous for the country and the human capital, for its development."

Zadornov said Russia is "honestly interested" in resolving conflicts with its neighbors and "with the West that largely determines — whether we like it or not — the rules in the international financial market and in geopolitics in general. The isolation trend, on the contrary, should be changed to cooperation."

Russian Prime Minister Dmitry Medvedev has tried to be more upbeat about the economic picture, noting that while oil revenue still accounts for 44% of Russia’s federal budget, that is considerably less than earlier times when it accounted for 70% of the budget.

“This goes to say that our budget revenue structure is changing for the better,” he said in a recent roundtable discussion on the economy on Russian television.