Previously, the Russian ruble was not the currency of choice for Russian citizens and the international banking system. The ruble was viewed as poor, moribund and ineffective.
However, as Russia has become an oil and gas superpower, its economy has also improved due to the wealth generated by this industry, aggressive business policies—including business consolidations by the Russian government—and more thoughtful and stringent economic policies.
With high oil prices and the resultant revenue to support the economy, the Russian government has both the opportunity and breathing room to craft economic reform. One major focus of economic reform is the Russian currency.
In June 2006, Russia lifted all currency controls and made the ruble a fully convertible currency, which is now freely tradable. In addition, by loosening both capital and currency controls, the Russian government hopes to encourage and broaden investment in Russia.
Current Economic Success
It seems that the Russian policies are working. High oil prices have resulted in increased value of the ruble, but foreign investment has also contributed to its rise as well. Over the course of the last five years, the ruble has risen 20 percent against the US dollar. The value of the US dollar against foreign currencies has also been weaker lately. More importantly, private capital investment in Russia has reportedly increased 360 percent in the first six months of this year compared to the previous year.
In addition and as a result of a stronger ruble, imported goods are now cheaper fueling a surge in consumer and luxury goods, once an anathema in Russia except for the very wealthy. As a result, the standard of living and consumption of goods is starting to mirror industrialized nations. Major Western consumer chains such as Starbucks and Home Depot are interested in the Russian market and stocks of grocery, electronics and other consumer companies are performing extremely well.
While Russia does run the risk of its economic prosperity being overly dependent on one main industry—such as oil and gas—to the detriment of other industries, it has also managed to amass one of the largest foreign currency reserves in the world. This reserve could be used to protect and shore up Russia’s currency. Russia has also created a ‘Stabilization Fund” from oil revenues as a further hedge and back up if needed against market and economic instability.
A Strategic Future
While the Cold War may be over, Russia is definitely trying to re-assert its dominance and influence on the world stage under the stewardship of Russian President Vladimir Putin. Russia has become increasingly aggressive in its foreign and economic policies. While still a military contender, Russia has also utilized other forms of power to express its will. Energy dependency has become a major economic weapon for Russia, threatening to withhold energy supplies, dominating regional energy supply corridors and increasing pricing. It is likely that the Putin government is interested not just in providing consumables and increased standard of living to his people, but is looking at increased economic status as the ticket to increased global power and influence.
In his 2006 State of the Union address, President Putin stated that the ruble should become more universal in international transactions and its zone of influence should be expanded. A major Russian economist has advocated that the central banks of the world should re-allocate some of its dollars into rubles. President Putin also has floated plans to charge foreign buyers of oil and gas in rubles instead of dollars, as well as establishing a ruble based oil and gas stock exchange.
The Path Ahead
Russia is not trying to emulate the economic bases of countries such as China and the United States, but is expressing its economic clout its own way. While investors may feel cautious after the economic frenzy for Western investments in Russia after the fall of the Soviet Union, the potential profits may be all the allure that is needed now.
Russia seems more stable now than in the 1990s with sounder economic policies and increased wealth thanks to oil and natural gas revenues. The Putin government has also consolidated government control over major assets and industries—such as the energy industry—and has very carefully “managed” foreign commercial interests in these key enterprises.
However, the government knows it needs foreign investment and is actively seeking that investment. The transformation of the ruble is yet another indication of how Russia is seeking to increase its economic power.
The recent mock benefit for the US dollar staged by a pro-government youth group is indicative of a wider ethos that Russia no longer needs to be dependent on US financial indicators, such as currency.
While it is unlikely that the ruble will displace the US dollar as the worldwide currency of choice any time soon, Russia is definitely involved in a competition with the US and is actively seeking to displace US influence in any manner it is able.
