After spending billions to prop up Russia's national currency, the Russian government has let the ruble slide to record lows, inciting panic among both companies and citizens.
After the Christmas and New Year's holidays in January, the Central Bank devalued the ruble five times in just one week. In January the ruble fell to 35.4 rubles per dollar--the lowest since early 1998, just before Russia's infamous default.
Since August, the Kremlin's efforts to prop up the ruble through infusions of cash led to a 34 percent decline in strategic currency reserves--to about $396 billion at the end of January. There has also been cash flight: since August, investors have withdrawn over $278 billion from Russia.
Since last fall, Economics Minister Alexei Kudrin has been recommending a sharp devaluation in the ruble, to avoid "salami" tactics, but Prime Minister Vladimir Putin has apparently decided that repeating the debacle of 1998, when citizens' savings were wiped out by the default and devaluation, was politically untenable and could lead to social unrest.
The ruble:dollar and ruble:euro exchange rates are closely tied to the price of oil, Russian Newsweek noted. The magazine predicted that, if oil drops to $30 per barrel, the exchange rate will fall to R38/$1; if oil rises back up to $60, the rate will stabilize at R33/$1. Yet analysts have also said that, if a panic occurs, all bets are off.
The atmosphere of uncertainty has led to a comeback for "conditional units" (uslovniye yedinitsy) or "U.E."s, as reported by The Moscow Times. The U.E.--which largely disappeared three years ago--is an arbitrarily set pricing index that is pegged to the dollar and the euro. Pricing in U.E. instead of rubles allows retailers to avoid changing prices so frequently when exchange rates are volatile.
DATA FOR CHART: US Department of Energy; Exchange-Rates.org
Source Citation
"Ruble watch: the U.E. makes a comeback." Russian Life Mar.-Apr. 2009: 11. General OneFile. Web. 11 Jan. 2010.
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