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Money Troubles: Russia's Weak Ruble Pulls Down Neighbors' Currencies


The Russian ruble has lost around 40 percent of its value against the dollar in the past year. (file photo)
The Russian ruble has lost around 40 percent of its value against the dollar in the past year. (file photo)

As the value of Russia's ruble tumbles amid low oil global prices and Western sanctions, it is taking the currencies of many former Soviet republics down with it.

Just ask Gagik Ghazaryan, an exporter in Armenia. He used to be able to sell soft drinks and canned food profitably to Russia before the ruble lost 40 percent of its value relative to the U.S. dollar over the course of this year.

Today, the ruble is so weak that his Russian customers can no longer afford his products, which are priced in dollars.

"It is about two months now that we have suspended our exports," he says. "We had an order worth $1.5 million from Russia, but we cannot supply the product because the ruble has depreciated."

"Our situation is very bad," he adds. "And we don’t know how to get out of it."

He is hardly alone. As Armenian exports suddenly lose their price competitiveness in the Russian market, the entire Armenian economy is reeling. Less foreign earnings are coming in and Armenia's own currency, the dram, has fallen 12 percent against the dollar since January.

The same thing is happening next door in Georgia. Moscow may not be Tbilisi's major trading partner, as it is Yerevan's, but Russia is the single biggest source of remittances from Georgians working abroad. Now, however, the rubles they send home inject far less money into the economy than before. That has helped bring the Georgian lari down 9 percent against the dollar since January.

The drop in the Armenian and Georgian currencies create an array of problems for both countries. It means each has to pay more for badly needed imports from the West and pay more to service their foreign debt. At the same time, they must spend some of their scarce foreign currency reserves to slow the rate at which their currencies lose value if the public is to maintain faith in the nation's money.

And the two Caucasian countries are hardly the only ones to feel the effects of the weakening Russian ruble.

Hurting Across The Board

Kazakhstan, which is both a major trading partner with Russia and an oil producer in its own right, has been badly hit by both the fall of the ruble and the shrinking price of oil. Rather than try to protect the value of the Kazakh currency, the tenge, the government decided to devalue it by 19 percent in February this year. Yet even that may not be enough to keep the currency from devaluing further next year.

"If oil stays around $70 to $75 a barrel, we will be looking for growth in Russia to be, well, no growth. We would be looking for [Russian] GDP [gross domestic product] to shrink 2 to 3 percent next year," notes Charles Robertson, global chief economist at Renaissance Capital in London.

"That is going to have a negative effect on [Russia's] neighbors and all you can try and do is compensate for that by depreciating your currency."

And there is another challenge: The slipping ruble is not only making it hard for Russians to afford Kazakh goods, it also means Kazakhstan must protect its own industrial and agricultural sectors from low-cost Russian imports flooding the market.

"It's about trying to maintain the competitiveness of their non-oil sector," Robertson says.

"You don't want to see Kazakhs just buying Russian imports because the ruble has got so cheap, you want them to continue to buy Kazakh products, maybe Kazakh steel, Kazakh minerals rather than Russian minerals. So [they] are playing a role to try to protect [their] own industry when the Kazakhs let the currency move."

With a huge fall in the ruble, the money millions of migrant workers in Russia send home is worth a lot less than it used to. (file photo)
With a huge fall in the ruble, the money millions of migrant workers in Russia send home is worth a lot less than it used to. (file photo)

In different, but equally uncomfortable, circumstances is Belarus. Its currency, the ruble, has slipped some 13 percent against the dollar since the start of the year. One reason is that the slump in the Russian ruble's value has reduced revenues from Belarus's two large refineries which convert Russian crude oil into gasoline and other products for the Russian market.

And now the pressure is rising further as Minsk and Moscow engage in a trade war over charges that Belarus is acting as a backdoor for smuggling banned EU milk and meat products into Russia.

Ironically, that trade war comes as the current Customs Union between Belarus, Russia, and Kazakhstan prepares to expand into a new Eurasian Economic Union (EEU), which will include Armenia and Kyrgyzstan and begin operations January 1.

Whether Minsk and Moscow can solve their differences ahead of time remains to be seen, as does whether Moscow will help its weaker EEU partners cope with the downturn in their economies.

"In recent years, Belarus has been very dependent upon Russian financial aid and Minsk must be a little concerned that, given Russia's own problems, Moscow would be less willing to provide future financing for Belarus," says Timothy Ash, an expert on emerging European states at Standard Bank in London. "But I don't think that is necessarily the case. For both Belarus and Armenia, Russia will be very eager, I think, to prop up those countries within the Eurasian Union because it wants to send a message that the Eurasian Union is a successful entity and that members help each other."

Diminishing Remittances

Several other countries on Russia's fringes are suffering from the ruble's collapse, mainly because they have large numbers of citizens working in Russia. Moldova, Tajikistan, Kyrgyzstan, and Uzbekistan have all seen the value of remittances those migrant workers send home diminish.

The Moldovan National Bank announced on December 11 that the country's currency, the leu, lost 17 percent of its value against the dollar this year due to the devaluation of the Russian currency as well as that of Ukraine, another important economic partner.

Tajikistan's somon has dropped 5.5 percent, Kyrgyzstan's som has dropped 15 percent, and Uzbekistan's som has dropped 9 percent. The three Central Asian states, which have many citizens working as migrant laborers in Kazakhstan, have also been hit by the economic downturn in that country.

Turkmenistan, a major gas exporter, has fared better. With pipelines to Russia and Europe, to China, and to Iran, it does not depend solely on the Russian market and it has sufficient foreign currency savings to keep its manat within a narrow band against the dollar. At the same time, few Turkmen go to Russia as migrant workers, so remittances are not an issue.

Oil-rich Azerbaijan looks still more impervious to the tough new economic realities in the region. It, too, is being battered by low oil prices but has a large stabilization fund to keep its currency, the manat, within its usual band against the dollar. At the same time, most of its trade is with Turkey, not Russia.

"It is less tied in to the Russian economy, more diversified in terms of its trade and export routes, and quite closely tied to Turkey," says Ash. "It gets quite a lot of trade and benefits from investment from the Turkish economy and Turkey is obviously doing very well."

The biggest loser in the region is Ukraine. Its currency, the hryvnia, has lost 86 percent of its value against the dollar since the start of the year as the country battles pro-Russian separatists and the country's economy is in crisis.

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