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Russia sells its oil on the international markets for petro-dollars or its derivatives.  Having received these credits, for purposes of conducting economic transactions within its territory, Russia must convert its petro-dollars into rubles.  The parity or conversion rate of petro-dollars to rubles is established on the international currency market, where on any given moment of any day, the current rates of exchange of all national currencies are quoted.  On the basis of this rate, the petro-dollars acquired for oil and to be converted are credited as Russian Central Bank (RCB) reserve credits on one side of the ledger, and on the other corresponding side of the ledger, the RCB records and issues rubles at the FX parity rate to the appropriate credit accounts of recipient Russian account holders, whomever they may be, whether public or private institutions.

Oil prices and rates of currency exchange can fluctuate with respect to one another.  Oil can rise in its nominal value or it can fall or it can remain steady over time; likewise, the number of rubles that can be obtained with a petro-dollar can rise or fall or remain steady over time.  How the fluctuations of oil price correlate with the fluctuations of the exchange rate between the ruble and the dollar all have different implications for the Russian economy.  To understand what these implications are, one needs to schematize the possible correlations between the price of oil and the price of the ruble in petro-dollar terms.

  1. If oil prices rise for a given level of oil production, then
    1. if the rate of exchange between the ruble and the petro-dollar remains steady (RUB/USD), the potential for expanding the Russian economy at a national level going forward increases. More petro-dollars earned from selling oil means that potentially more rubles may be credited to Russian national accounts. (GOOD)
    2. if the rate of exchange between the ruble and the petro-dollar rises (RUB/USD), the potential for expanding the Russian economy is even greater than if the rate remains steady because in addition to an increase in petro-dollars earned on an increase in the price of oil, each petro-dollar now converts into a greater number of rubles. (GOOD and BETTER)
    3. if the rate of exchange between the ruble and the petro-dollar falls (RUB/USD), the potential for expanding the Russian economy is now attenuated because an increase in petro-dollars earned on the basis of an increase in the price of oil is now being offset by a petro-dollar converting into fewer rubles. Depending upon how fast, relative to the increasing price of oil, the ruble is rising in dollar-value, any expansion of the Russian economy can be preempted or even reversed. The offset between the falling exchange rate of the ruble and the rate at which the price of oil is increasing is one of inverse proportionality. For example, if the number of rubles to be bought by a dollar were to decrease by half (divided by 2) and the price of oil were to double (multiplied by 2), nothing at all changes in terms of the number rubles potentially available to the Russian economy from the proceeds of selling oil. But all else remaining equal, if the price of oil increases by a factor of less than 2, which is to say that the exchange rate is falling faster than any increase in oil price, the scenario becomes increasingly negative for the Russian economy. (BAD and WORSE)
  1. If oil prices fall for a given level of oil production, then
    1. if the rate of exchange between the ruble and the petro-dollar remains steady (RUB/USD), then the potential for expanding the Russian economy at a national level going forward decreases. Fewer petro-dollars earned from selling oil means that potentially fewer rubles may be credited to Russian accounts. (BAD)
    2. if the rate of exchange between the ruble and the petro-dollar rises (RUB/USD), then the potential for expanding the Russian economy becomes greater than if the rate remains steady because a rising exchange rate for the ruble (RUB/USD) offsets a decrease in the number of petro-dollars earned on an decrease in the price of oil, since each dollar now converts into a greater number of rubles. Depending upon how fast, relative to the decreasing price of oil, the ruble is falling in dollar-value, any contraction of the Russian economy can be potentially arrested or even reversed. The offset between the rising exchange rate of the ruble and the rate at which the price of oil is decreasing is one of inverse proportionality. For example, if the number of rubles that could be purchased by a petro-dollar were to double (multiplied by 2) and the price of oil were to be halved (divided by 2), nothing at all changes in terms of the number rubles potentially available to the Russian economy from the proceeds of selling oil. But all else remaining equal, if the number of rubles a dollar could buy rose by more than 2, which is to say that the exchange rate is rising faster than the rate at which the oil price is falling, the number of rubles that could be spent or invested in the Russian economy increases. (GOOD)
    3. if the rate of exchange between the ruble and the petro-dollar falls (RUB/USD), then the potential for expanding the Russian economy is even more constrained than if the rate remains steady because in addition to a decrease in petro-dollars earned on a decrease in the price of oil, each petro-dollar now converts to a smaller number of rubles. (BAD and Worse)

The take away, then, is that a strong ruble, a more expensive ruble relative to the petro-dollar, or what is the same, a falling exchange rate in favor of the ruble (RUB/USD), is actually a liability for the Russian economy under any circumstance, regardless of whether the price of oil is trending up or down in petro-dollar terms.   If the objective is to develop or stimulate the Russian economy, to increase its domestic output on a national level, then a strong or strengthening ruble is never a good thing, and especially in a situation where the only mechanism available for increasing credits available for tangible domestic investments is revenue first to be credited as an asset amongst the RCB’s foreign reserves and then issued at its FX rate on the ruble side of the central bank’s national account ledger.

In the current conjuncture of collapsing oil prices, Russia could actually benefit from a crashing ruble and more so if its rate of decline exceeds that of oil prices.  The increasing ruble revenue, however, would have to be channeled into productive, tangible domestic investments and not squandered in speculation.

Furthermore, the purported tactic of crashing Russia’s economy by crashing the price of oil can be preempted by a proportionate devaluation of the ruble in the currency markets.