Why Gasoline Prices Have Plummeted – November 7, 2014

Russia’s currency suffered its worst week since the financial crisis of the 1990s destroyed the country’s economy, dropping over 10% in just the last couple days.

With Russia teetering on the brink of recession and buffeted by fleeing investors, plummeting oil prices, costly adventures in Crimea and Ukraine, and the resulting Western sanctions, the ruble hit an historic low of 48.60 rubles to the U.S. dollar this morning.

It recovered slightly this afternoon after Russia’s Central Bank pledged to intervene, though it remains unclear how much it will do and whether it will just seek to maintain the ruble at the current level or try to bring it back down.

The ruble began the year at around 32 rubles to the dollar, but began to decline amid Russia’s foundering economy and conflicts next door. The trend picked up in September and accelerated again in October.

A 300 ruble lunch, for example, that would have cost $9.37 in January, and $7.12 last week, would be just $6.18 this morning.

The decline has contributed to inflation in Russia, which had already accelerated after Russia banned certain foods from Europe and the United States in response to Western sanctions. Food prices in particular have shot up, affecting many Russians with low or fixed incomes in President Vladimir Putin’s political base.

The Central Bank had been trying to walk away from its longstanding policy of unlimited interventions to support the ruble. At one point last month it was spending around $2 billion each day to prop up the currency.

But after the bank announced plans to abandon that approach this week, the floodgates opened. Russian media reported many Russians raced to convert their savings into foreign currencies, further driving down the ruble’s value. According to some reports, dollars and euros are in short supply in Moscow.

Oil prices have been one of the biggest factors in the ruble’s decline. Russia’s benchmark Urals crude oil blend has declined by about 25% since June to just over $80 a barrel. Russia relies heavily on oil revenues to fund much of its budget, which anticipated oil prices at $114 per barrel.

The declining ruble, however, may offset some of that lost revenue as the oil is sold in US dollars. When converted back into rubles at the lower exchange rate, it will provide more rubles to cover the budget and help fund some of Putin’s ambitious campaign promises, which include increased wages.