How Low Can it Go?

As financial observer Barbara Kollmeyer noted, "The Russian ruble is fishing for a bottom, but doesn't look to find it anytime soon."

The ruble fell 3.9% last week and 23% in the year to date, making it one of the world's worst performing currencies, just above the Turkish lira.

At the date of this writing, $1 equaled 91.2 rubles.

The immediate cause is the Prigozhin Mutiny, which contributed to half of the recent decline, complicated by underlying complexities that continue to pummel the Russian economy, namely:

1. a costly war of aggression against its Ukrainian neighbor
2. additional tightening of Western economic sanctions
3. continued decline in sales of oil and gas (see 2)
4. falling global oil prices

The ruble exchange rate has now moved out of the "comfort zone" (80-90 rubles per dollar) previously signaled by Deputy Prime Minister Andrei Belousov, and it is not clear how much effort the government will undertake to stem a continued decline.

Since the war began, the ruble has not been a free-floating currency, but has an exchange rate set falsely by agreement between major export companies and the Finance Ministry.

With little prospect of increased foreign trade or earnings, the government will need to cut spending or raise taxes if it wants to prop up the ruble. Some analysts are predicting positive effects from a Central Bank interest rate hike on July 21, while others warn that at this point it would not take much to spook the public and start a run on ATMs.

Economist Konstantin Sonin does not see a pretty picture ahead: "What remains is continuing capital flight, decreasing budget revenues, both oil/gas and domestic taxes, declining real incomes, CB [central bank] reserves lost because of the war – so the ruble doesn't have anywhere to go but down. Not necessarily as fast as in the last couple of months, though," he said.