Postingan ini sengaja saya ketik dalam bahasa inggris agar masyarakat dunia bisa ikut membaca, untuk versi indonesia, bisa di google translate atau hubungi saya, nanti saya beri penjelasan dalam bahasa indonesia.
I'm actually a medical student, but born with interest in monetary science. I may not be a person with particular degree in economy, but self learning of currency since 1st Grade, and international politics since Junior High School, i think i can help to make an explanation in simple words to dummies who may have a huge question... what's with russian economy bla ..bla ...bla ??? Asking an PhD economy expert or so will never help them as i guarantee dummies will just floating around without direction if required to listen and understand such level of explanation. Let me do a quick easy explanation.
Despite extensive reading and data searching, anyone who have an argument with my post or opinion is more than welcome to message/ comment it, so we all can have a better understanding.
These are the chain of events that leads to the current situation as of 27 December 2014.
1. Russian reserves increased when oil price hiked.
Russian economy is highly dependent on oil, as 70% of it's export is oil. During the hike of oil, especially from 2010 onwards, where crude oil priced even reached US$110/ barrel, Russian Gold reserve is highly increased. Money brings power, with more money, the Russians think they have more power and although they do realize the west is more than excited to put economic sanctions should Russia do something controversial, they're confident their hugh reserves are enough to combat any serious impact resulting from western sanctions. At it's peak, Russian reserve is thought to be above $500 billion.
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Russian Rouble notes. (courtesy: www.presstv.ir) |
2. The Confidence in disrupting Ukraine
The Crimean crisis in 2014 starts at February 2014, when then president, Viktor Yanukovych poised to make a relations to the Russians in a multi billion dollar deals, instead of the West (Eurozone-NATO-US). Enough is enough for Ukrainian public as they fed up with economic standstill from vast corruption, etc. They blame the Russians in manipulating the (certain) politicians that Ukraine didn't thrive well. Ukrainians prefer a better relations to the west, not russia. Viktor's action caused a civil unrest which eventually lead to his impeachment and he fled to Russia.
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Ukraine's then president, Viktor Yanukovych. (courtesy: consortiumnews.com) |
3. Russia invades Crimea.
Ukrainian public actions is viewed as a thread to Russia's potentially billion dollar deals. Crimean peninsula, a region of Ukraine, is notably have more ethnic Russians than Ukraine. They prefer a better relations to Russia. Using the reason to protect the interest of majority Russian ethnics in Crimea, Kremlin backs a pro-russian rebels which cause somewhat a civil war in crimea. However, Russian never confirmed their interventions in Ukraine. In a dummies view, it's like Russia says "Hey, if you don't give us the deals and get closer to us, we'll make a chaos in your country".
4. The western Sanctions
Although Russia deny any involvement in Ukraine, the whole world knows it. The west (incl US) immediately impose economic sanctions to pressure Russia out of invading crimea. Be honest, no one do that for free, it's because the west also expect to get those billion dollar deals and, in other hand, to decrease russian influence in the international world.
The sanctions did cause somewhat damage to Russian economy, however, they already anticipated this beforehand and their confidence with colossal international reserves still makes them survived, although Rouble (Russian Currency) did losing some points to US$.
some refenrences: http://www.dailymail.co.uk/news/article-2836809/From-Vlad-worse-snubbed-airport-sit-dinner-shunted-edge-family-photo-condemned-world-leaders-s-no-wonder-President-Putin-Russian-leave-G20-summit.html
5. The tumble of Oil Price
Following chain of events in the oil market, suddenly Oil price lowers down at the 4th quarter of 2014. From what was $100+/barrel, it drops down to $58/ barrel. Since Russian export relies heavily on oil, this 50% drop hits Russia hard. They never expect the oil price to collapse, and they never prepared if it happend. They have a confidence their reserve is enough power to stop the impact from western sanctions, but this (oil fall) is beyond everyone in Russia's expectations.
For more detail explanation why the oil price tumbles, read this:
http://www.oil-price.net/en/articles/oil-price-drops-on-oversupply.php
6. The Russian International Reserve - Rouble crashes - Shocking Interest Rate
The combination of western sanctions and unexpected falling oil price results in a heavy economic disease they never predict and prepared for. Decrease in export means a losing ratio against import. This means more of Russian wealth is going out (because import means they spent money to other country out). This leads to a serious dent to Russian roubles. Things get worst when trust against the rouble decrease causing mass exchange from rouble to other currency. Logically, when everyone distrust rouble and wish to swap it with other safer option (eg: US$) meant that more rouble is in the market and US demand increases. As we know in basic economy, lower demand combines with oversupply means a decrease in price, in this case, the Rouble is losing ground against the US as well as other major currencies.
As more people swapped Rouble for others (notably Euro, GBP, USD, CHF) rouble gets more weaken and thus leads to many shops increase their prices, that means increase of inflation (it means same amount of money can only buy less of items). This leads to panic buying, people flock to shops to buy anything they can just to get rid of rouble.
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Russians queue to withdraw their money in 1998's default (courtesy: AP) |
Russia must stop this or their economy will collapse if export continues to decline rapidly while import is still. A disastrous of level of exchange rate can cause the rouble worthless and the Russia can be in a deep trouble. When they lose money, they lose power.
In a day in December 2014, the rouble steeps so rapidly it even reaches 80 Rouble to the Dollar!! (normally is around 35 rouble/ $). This event leads to the central bank to hike the interest rate from 10,5% to 17% the next day!!!! This is a desperate attempt of the Russians to stop people from discarding their rouble and tempt them with whopping rates in hope they will chose to keep rouble in their bank accounts. However, this event leads people to be more panicked as high central bank rate indirectly means economy is getting worse. So in another desperate dash to save rouble and gain public trust, the Russians eventually used some 17% of their international reserve just to buy back the roubles public had thrown in the market. Russian reserves rapidly decline from what was a glorious mighty $500 Billion +, down to $398 Billion. This attempt i think it works for now (as of 27 December 2014) as the halt the tumble of the rouble (is stays around 58 rouble/ US$) and i think public trust at least didn't get any lower, for now.
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An exchage rate board in Moscow. Dec 2014. (courtesy: theguardian.com) |
about the reserve fall: http://www.bloomberg.com/news/2014-12-25/ruble-defense-curtails-russian-reserves-by-15-7-billion-in-week.html
But remember, decreasing reserve can cause less international investor's confidence to invest there (economist may call it as Bond Credit Rating), and making revenues under pressure for the Russians.
7. The Swiss National Bank's (SNB) sensational move.
Swiss, is long referred as a save heaven for investors. The currency is relatively stable, as since the politic is known for a long history of stability. During the mass dumping of rouble (converting it to other currency), many wealthy russians opted to buy colossal amount of Swiss Francs (CHF). Now, that means a surge increase of CHF demand. Remember a basic concept, when demand increases, price will increase. In this case, the Francs is getting some strength. A good currency power is nice, but when your currency is way to expensive, it can lead the world to buy less of your goods, meaning that Export may decrease and economy growth can stall. SNB must find a way to weaken it's currency to a tolerable level for the economic world. So in order to stop the russians from buying CHF, they must make CHF less attractive, how? They make the central bank rate -0.75%
Negative bank rates means that if you keep your money in the bank, instead of getting a small extra cash in interest, your money will vaporize a little by little, taken away by the bank (this is what -% means). So this will make people felt a loss in someways if keeping CHF. As far as i know, this is the first time ever for a bank to impose a negative bank rates. Usually they just do 0%. But i'm yet to research if there's any other central bank in history to impose negative rate, and does this SNB sensation action had do what it was intended for (to lower CHF rate to a considerable level for economic growth).
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Swiss National Bank HQ. |
Ok, so that's all for now i can explain. Keep reading the news guys, i strongly recommend Bloomberg. To ease you in understanding, if possible next time i'll be back to insert some graphs, more reference links, and mind map to this post. Keep up with my updates/revised edition and please don't hesitate to comment if you have a differences in opinion regarding the chain of events, or have something to add.
Thanks!