Russian Rouble Is Another Casualty Of Current Climate

Every developed country is having troubles at the moment, but for Russia the word ‘devaluation’ has become an essential part of their vocabulary.  This story on the CNBC website – at http://www.cnbc.com/id/28429975 - shows just how badly the old year ended for Russia, and there is every indication that 2009 will bring fresh problems to get to grips with.

So how does devaluation work?  Everyone understands the nature of fluctuating exchange rates, and devaluation is really a process whereby a country decides to reduce their own currency in value, rather than letting it rise or fall by itself.

For example, take a look at what has happened in recent months with regard to the British pound.  This has fallen in value against many currencies, notably the US dollar.  But if the British government had decided to reduce it in value from $2.00 per pound to around $1.45 as it is at the time of writing, this would have been called devaluation.

Obviously there are no hard and fast rules when it comes to devaluing a currency.  Every economic situation is different, and it can be tricky to decide how and when to devalue a currency.  Everyone is watching Russia with interest and trepidation to see how they handle the situation.

There are basically two ways of doing it however.  Firstly you can knock off a large amount in one hit, reducing the value of the currency markedly in one fell swoop.  Alternatively – and this is the route that Russia is taking this time around – you can make a series of alterations that aren’t quite so hard to bear.  It’s very much like tightening a screw; if you over tighten it very quickly, the screw sinks into the wood and leaves a mark you don’t want.  However if you do it slowly, turn by turn, you will be able to stop at just the right time to get the results you desire.

Taking a look at the results on a currency converter for the Russian ruble against various other currencies during December 2008 partially shows the situation it is in.  On 1st December, the ruble could be exchanged for 0.0357 US dollars.  This climbed to 0.0360 on the 12th of the month, before dropping back to 0.0348 on Christmas Eve, before the markets closed for the seasonal break.  By the time New Year’s Eve came around, the exchange rate had dropped to 0.0337.

But perhaps a more telling picture comes when you compare the Russian ruble to another currency which is having real troubles at the moment – and that is the British pound.

On 1st December the Russian ruble could claim 0.0238 British pounds, and that had climbed to 0.0244 by the 4th of the month.  On the 15th by the time the markets closed, the Russian ruble was bagging a lower rate of 0.0239, further showing that it didn’t have the same power over the currency as many other currencies do at the moment.

And by the time the year drew to a close, the exchange rate had slipped further to 0.0230.  This is a telling figure, because it is a sign that between these two currencies, the Russian ruble is by far the weaker of the two.

It fell steadily against the Australian dollar throughout December as well.  From a standing start of 0.0556 against the Aussie dollar, it fell steadily throughout the month, hitting 0.0539 at the halfway point on the 15th and finally ending the year on the 31st with an exchange rate of 0.0491 – the lowest one of the whole month.

So it seems that devaluation will be a regular part of the Russian vocabulary during the first part of 2009.  We shall see whether this has the desired effect on the Russian economy, or whether the situation worsens as a result of it.

So could we end up seeing other currencies devaluing themselves to help in the current situation?  It could happen, although which ones would do it would remain to be seen.  One thing is certain though – every single day brings fresh news and fresh events to digest, and we are certain that our news for January will be just as intriguing as the news that occurred during the last part of 2008.

Stay tuned for more on the Russian ruble in the future.