The outgoing year 2015 proved especially challenging for the Russian economy—and the ruble in particular. Oil prices continued falling toward historic lows; U.S. and EU economic sanctions against Russia remained fully in force, with no signs of easing; and geopolitical tensions persisted. Below, we review the year’s outcomes and assess the ruble’s prospects—and Russia’s broader economic outlook—for 2016.
What Did the Ruble’s ‘Free Float’ Achieve?
On November 10, 2014—just over a year ago—the Central Bank of Russia (CBR) made an unprecedented post-Soviet decision: to adopt a freely floating exchange rate for the ruble. Headlines proclaimed, “The ruble set adrift.”
Over the following 12 months, the ruble depreciated nearly 32% against the U.S. dollar—the third-worst performance among emerging-market currencies. Only the Brazilian real and Colombian peso fell further in 2015.
This policy was justified by the CBR as a means to preserve foreign exchange reserves and reduce pressure on monetary policy. For consumers, however, it had strongly negative consequences; for oil exporters, it delivered a significant boost.
So how did the floating ruble exchange rate impact Russia’s economy in 2015?
1. Inflation in Russia
A ruble depreciation exceeding 30% against the dollar drove inflation to its highest level in 13 years. To curb rising prices, the CBR raised its key interest rate to 17% in December 2014. Though the rate has since been reduced to 11%, inflation remains nearly four times the CBR’s official target.
2. Poverty Levels Among Russians
In line with basic economic principles, soaring inflation eroded purchasing power. Income declines were so steep that many citizens fell below the poverty line. According to World Bank forecasts, poverty in Russia will rise significantly in 2015—the first such increase since the late-1990s financial crisis.
3. Wage Reductions
Paradoxically, Russia’s labor market responded to crisis not through mass layoffs—but via reduced working hours and wage cuts. On average, nominal wages tracked oil prices—the cornerstone of Russia’s exports—and roughly equaled the value of 10 barrels of oil.
4. A Shift Toward Frugality
Falling incomes reshaped consumer behavior and sentiment. The import ban—intended to stimulate domestic production—limited access to high-quality goods, while local alternatives often carried higher prices and lower quality.
5. Oil Export Revenues
Due to Russia’s tax system—and because oil exporters earn revenue in foreign currency but incur costs in rubles—they benefited directly from ruble depreciation. Despite falling oil prices, profit margins for major exporters remained stable.
A government proposal now under discussion would introduce an additional profit tax on oil and gas companies starting in 2016—making a weak ruble less advantageous for energy exporters.
Outlook for the Ruble and Russian Economy
Current prospects hinge heavily on geopolitics—especially whether Western sanctions intensify or ease, and how Russia responds. Setting geopolitics aside, let’s examine the economic fundamentals.
1. End of Recession?
Russia’s Minister of Economic Development, Alexey Ulyukayev, declared the end of recession and forecast economic growth. His assessment relied on monthly GDP estimates prepared by the Ministry. Yet monthly data are preliminary and non-standard—international accounting practices rely on quarterly and annual figures.
Analysts project Russian GDP growth over the next five years will fluctuate narrowly between −0.5% and +1.5%, down sharply from the 4.6% average annual growth recorded between 2000 and 2014. Russia’s economy is expected to stagnate in 2016 and grow by ~1% in 2017.
ForTrader analysts identify prolonged stagnation as the primary risk. Without structural reforms addressing fundamental imbalances—between commodity and manufacturing sectors, public and private capital, and social and fiscal policy—the crisis may deepen and become increasingly difficult to resolve.
2. Capital Inflows
According to Russia’s Ministry of Finance, the third quarter of 2015 saw the first net capital inflow in several years.
At first glance, this appears positive. But closer inspection reveals a different story: the inflow largely reflects repatriated funds—Russian entrepreneurs bringing money back from abroad. With external borrowing unavailable and domestic financing scarce, businesses are forced to return offshore capital just to keep operations afloat.
Currently, investment in Russia stands at 20% of GDP—the lowest share among emerging markets (matching only Brazil).
Russia accounts for roughly 4% of the MSCI Emerging Markets Index—a weight that nearly triggered its exclusion in December 2015 amid concerns over capital flow restrictions.
3. Oil Prices
Oil prices remain the dominant driver of the ruble’s exchange rate.
Saudi Arabia reclaimed its position as the world’s top oil producer for the first time since 2003, averaging 10.19 million barrels per day over the first nine months of 2015.
Russia, now ranked second globally in hydrocarbon output, produced an average of 10.12 million barrels per day during the same period.
Global oil production also rose: over the first nine months of 2015, output increased 1.8% year-on-year—to 74.2 million barrels per day—as major producers ramped up output to defend market share and offset losses from collapsing oil prices.
The conclusion is straightforward: no major producer plans to cut output. Given the ongoing U.S. dollar strength cycle, oil prices are likely to fall further—not rise.
To avoid depleting foreign exchange reserves, the ruble would need to depreciate another 13% by end-2016.
Economic diversification efforts remain largely theoretical. The oil-and-gas sector still dominates—and benefits directly from a weak ruble.
The Ruble as an Oil Futures Derivative
Regrettably, Russia’s economy—and the ruble’s exchange rate—remain tightly coupled to oil prices. Meanwhile, oil market dynamics offer little hope for meaningful price recovery; in fact, most oil price forecasts are decisively bearish.
In this context, it is difficult to identify credible catalysts for ruble appreciation capable of offsetting oil-driven weakness—or for sustainable economic growth under current conditions. As long as the ruble behaves less like a sovereign currency and more like a derivative of oil futures, and no structural reforms take hold, optimistic forecasts for 2016 are unwarranted.
This article appears in the milestone 100th issue of ForTrader magazine.
FAQ
Why did the ruble weaken so much in 2015?
Primarily due to falling oil prices, sustained Western sanctions, and the Central Bank’s shift to a free-floating exchange rate in November 2014—leading to a 32% depreciation against the USD.
Is the ruble tied to oil prices?
Yes—strongly. The ruble’s exchange rate closely tracks oil prices, functioning more like an oil futures derivative than an independent currency due to Russia’s export structure and fiscal reliance on energy revenues.
What are the main risks for the ruble in 2016?
Continued low oil prices, potential new sanctions or capital controls, failure to diversify the economy, and persistent inflation—despite recent interest rate cuts—pose the greatest near-term risks.
