Four Issues Affecting Putin, Russia, and the Global FX Market

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Through mid-year, the Russian ruble is down approximately 9% on the U.S. dollar. The Russian economy isn't faring much better, limping along at a 1% growth clip so far in 2018.

Though there are a variety of reasons the ruble is weakened, the largest contributors are the fresh set of economic sanctions slapped on Russia by the U.S. in August, and a government that relies too much on the price of oil as other sectors of its economy falter.

As a result, the ruble (RUB) stands at a two-year low against the U.S. dollar, as risk-averse foreign investors start to shy away from doing business in Russia – even after the remarkable success of 2018's soccer World Cup, which was held in the country in June and July.

Putin is dealing with a souring economy and a skittish foreign investment base in 2018.

At the center of it all stands Vladimir Putin, leader of Russia - as both prime minister and president - since 1999. Almost 20 years later, Putin is dealing with a souring economy and a skittish foreign investment base in 2018, largely because of four main issues:

1. Tough Sanctions 

The economic sanctions imposed on Russia were in direct response to the government's move to use nerve-gas against a former Russian spy. That's prohibited by the U.S.—which considers the use of any chemical and biological weapons to be a criminal act—leading the U.S. to file tough economic sanctions as a result.

The sanctions ban the sale of critical manufacturing and technology exports to Russian businesses, prohibits military weapon sales, and curbs access to U.S. and international bank loans—all moves that would have otherwise benefited the Russian economy.

2. Over-dependence on oil 

With Putin's backing, Russia has long sought to be a major player in the international oil production market, reaching the pinnacle in 2011 when it led the world in oil production. Yet with the steady growth of shale oil production in the U.S. and the availability of less expensive gas production, Russia is losing market share in the global oil market—a scenario it can't afford given that oil and gas comprise 40% of the nation's total revenues according to the Energy Information Association, and are mainstay exports for Russia. Comparably, oil and gas constitute just 10% of U.S. gross domestic product.

3. Lack of foreign direct investment

Russia isn't attracting the foreign direct investment it needs to support and grow its struggling industries.

Russia just isn't attracting the foreign direct investment (FDI) it needs to support and grow its struggling industries. Securing investment would make Russian companies more competitive on the global economic stage - a difficult task due to Putin's heavy-handed political machine which has engineered the invasion of Crimea, the accused hacking of the U.S. presidential campaign, and a weak record on human rights, among other issues in recent years.

Russia only attracted a measly $7 billion in FDI in 2015 and $28 billion in 2017, according to the Central Bank of Russia. Putin will have to sell Russia as a business haven more robustly going forward to get risk-averse foreign investors off the fence and into the Russian economy.
 

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4. A declining Ruble

The Russian ruble stands at a two-year low against the U.S. dollar, falling below the critical level of 65 to the dollar (it fell to 66 against the dollar in early August). That's a big issue for Putin and his government, as the fall of the ruble triggers other outcomes that are damaging to the Russian economy, like reducing the purchasing power of its citizens and making the purchase of foreign goods and services (especially travel) much more prohibitive and thus further crimping GDP.

Economic growth for Russia is pegged at 1.5%-1.8% for 2018-2020, according to the World Bank. For now, Putin seems to be pushing a “western plot" narrative against Russia and its faltering economy. With a 56 million majority vote in last March's presidential elections, that strategy could be buying him such much needed time—for now.

Putin Under the Spotlight

Bundle it all together and it shows that President Putin has a lot on his plate heading into 2019, as foreign investors increasingly keep the Russian economy at arm's length. With sanctions in play, an over-reliance on oil a major risk, a ruble in decline, and increasing poverty in his country, it's no wonder FX markets are giving the Russian bear a wide berth in 2018.

If the scenario lasts much longer, it could put Putin's own political future in Russia—19 years running—at significant risk.


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