30 Jan Russia’s Ruble, Oil, Rising Rates, and Your Retirement Investment
Last year it was impossible to turn on the TV, listen to talk radio, or browse the web without encountering a story about Russia, its incursion into Ukraine, and President Vladimir Putin’s staunch foreign policy towards the West. The majority of people believed Russia was flexing its muscle in the face of cold war adversaries, finally brushing off its stigma of being considered a lesser power since its post-Soviet era days.
On the surface, Russia’s actions look strong and carefully calculated, and if you’re looking primarily from a military point of view – then yes. However, a careful look at the economics of the country and recent factors like such as foreign imposed sanctions, falling oil prices, and interest rate manipulation reveal a far different story than the one typically presented. Since we live in a global economy, it’s important for you to understand how a falling Russian ruble, oil prices, and rate hikes can and may have already effected your retirement investment abroad and at home.
What’s happening in Russia?
The Russian ruble has been falling since late last year and reached a low not seen against the dollar since 1998. At the end of 2014 the ruble was trading at 70 rubles to 1 dollar. It’s important to understand the landscape of the Russian economy to see why the ruble has taken a free fall. Russia is not a service or information based economy like United States. It’s also not a manufacturing mega-player like China or other East Asian countries. What Russia has done well and still relies on today is their massive oil exports. They supply much of East Europe with oil at the tune of billions of dollars a year. They also recently signed a large contract with China for tens of billions.
It is in Russia’s best interest when demand is high and prices are also high. However, the exact opposite has been happening over the past year. Oil demand has been dropping and prices have plummeted as well. This means that the money Russia relies on to subsidize and stimulate its fragile economy has been cut drastically.
Russia’s response has been multi-faceted. One is the incursion into Ukraine, specifically Crimea. Crimea is important to the psyche of the Russian populous, no only for its history, but it also happens to be hub for billions of dollars in high-stakes gambling. Under Russian control it can now be used as a steady stream of revenue.
Another reaction has been to simply print more rubles. They’ve done this because since the ruble’s value is falling, citizens have been investing in more stable, foreign currencies. Also, large Russian oil companies are using the extra rubles to convert and hoard dollars in order to repay loans and debt. Of course all of this printing devalues the ruble even more, exacerbating the condition.
Finally, in order to halt the free-fall of the ruble and to save it from becoming absolutely worthless, Russia has drastically raised interest rates overnight from 10.5% to 17%. The strategy behind this is to encourage its citizens and foreign investors to invest in the ruble more returns that far surpass any other currency investment out there. However, this move also slows domestic growth in the long run.
How can it affect your money?
As you can see, there are an amalgamation of factors that go much deeper that can be used to explain just what in the world is going on with Russia besides cold-war fear mongering. What’s important to realize though is that what happens around the world directly effects you and your investments, particularly if you have money abroad. For instance, because much of Europe is dependent on Russian oil for energy, any pains that effect Russian production or exports effect all. Since Russia is receiving less per barrel, they can raise provision contracts to make up for their losses – putting more strain on other countries’ economies. Add Russia’s aggressive military moves in to the equation and you have a swell of growing worry for a highly interconnected continent.
American investment can now be directly affected by the tumultuous events happening from week to week as institutions become less inclined to lend money, companies anxious about investment and growth, and investors worried about their bottom line. There are no independent markets in today’s economy. What happens in a foreign country far away can be felt the very next day right at home. If you have securities or investments abroad, or you have a portfolio that you’re unsure as to the allocation of its assets, now would be a good time to revisit and review them.
You Can Protect Your Investment.
At home or abroad, here at Reliance Retirement our mission is to protect your investments and returns from today’s interconnected, overlapping global economy. When uncertainty grows in the financial world, Reliance kicks in to help you stay on track.