1. The causes of the sharp fall of ruble

The devaluation of the ruble is not an emergency but falls into the orbit of the market. In the past two years, it did not perform well in the market and showed a trend of gradual decline. Constant depreciation was highly likely, which analysts had expected. However, the large scale of the decline and the sharpness of the fall were out of analysts' expectations. From a comprehensive analysis of the international market and Russian domestic economic conditions, we can see that several factors, superficial or deep-rooted, contributed to the vicious decline of the ruble. The direct reasons were the strong return of the dollar, steep fall of oil prices and economic sanctions imposed by the West due to the Ukrainian crisis. The fundamental reason was that the Russian economy had its own severe defects.

1.1 The dollar became tough, triggering other currencies to fall

During the rule of former US president Bill Clinton, the US government adopted a strong-dollar policy and the currency rate of the dollar kept stable. During the two tenures of George W. Bush, the US saw a sluggish economy and the currency rate had a weak performance. The situation lasted till the first tenure of incumbent President Barack Obama. In recent years, the US economy has shown an upward trend and the Business Climate Index kept climbing. The situation became even better since the beginning of 2014, especially when the rapid growth since the third quarter far exceeded the market expectation. This prompted US financial authorities to abandon the quantitative easing policy that had been implemented for years. After the 2008 global financial crisis, in order to get away with the crisis and revive the economy, the US financial institutions launched three rounds of quantitative easing schemes which lasted for six years. When these policies were implemented, the US Federal Reserve initiated large-scale asset-purchasing projects. The huge bond-buying program aimed to bring down interest rates so as to boost economic development and escape the crisis. During the six years, the Fed purchased assets worth $3.9 trillion. The release of such huge amount of bonds imposed enormous pressure on the dollar, whose weaknesses became more apparent. In other words, the most direct impact on the dollar brought about by the quantitative easing policy was devaluation. Similarly, an end to the policy resulted in the gradual appreciation of the dollar and the large-scale in-flow of capital. On the contrary, currencies of other economies were depreciated and capital went abroad. Given the current American economic situation, international financial institutions and central banks of other countries have predicted that the Fed would increase the interest rate in the near future. This prediction further speeded up the in-flow of dollars. Under such circumstances, currencies of other economies, especially the newly emerging economies that are sensitive toward the dollar, undoubtedly bore more pressure from devaluation.

This viewpoint was echoed by the Bloomberg which tracked the trajectory of key rates of currencies from 20 emerging economies. Since 2014, the index plummeted by more than 10 percent. On December 15, 2014, it even fell to the lowest ebb since April, 2003. On that day, the Indonesian rupiah against the dollar reached the lowest point since August, 1998. The Malaysian ringgit also experienced the sharpest fall on that single day since the Asian financial crisis. The Indian rupee fell prominently to the lowest end within that year. Besides, currencies of newly emerging economies such as Brazil and China also depreciated significantly during the same period. Against this backdrop, the steep fall of the currency of Russia, another newly emerging economy, was reasonable.

1.2 The continuous fall of international oil prices dragged the ruble down

The ruble has a strong relationship with international oil prices. For quite a long time, the Russian economy has heavily depended on the energy industry. The profit from oil export has been the most important source of its national income. In the past 20 years, such dependence has been enhanced by the homogeneous economic landscape in Russia. This economic structure determined the close relationship between the ruble and oil prices. The latter is the former's important pillar and exerts a huge impact on the former's values. If oil prices go up, the ruble will stay strong and vice versa. The more oil prices fall, the more steeply the rule plummeted. This has been a fixed rule for years.

In recent years, the shale gas revolution has altered the landscape of the international energy market. As more shale gas was found across the globe, the proved reserves of mineral energy in the world have significantly increased. Some countries suddenly became an oil-rich one. This drastic change has altered the original supply-demand relationship, resulting in the decline of oil prices. As the market competition intensified, traditional oil export powers began to worry about losing market shares and refused to reduce production even when the supply of oil increased. This caused oil prices to drop. Especially, though once the world's largest oil importer, the US government opened up oil exploitation on its own soil, leading to its decreased import of oil. In the next few years, it will become a net oil exporter from a net importer. This shift dealt a heavy blow to international oil prices. Since 2014, the price has gone down to about $50 a barrel from over $100 at the beginning of the year, and it is expected to continue to fall. This has had enormous impact on the ruble.

1.3 Western economic sanctions on Russia added pressure on the ruble

Since the Ukrainian crisis, the relations between Russia and the West have seen a sharp downtrend with confrontations intensifying. Especially after Crimea split from Ukraine and joined Russia, Russia-West ties fell to the lowest ebb since the dissolution of the Soviet Union. Political and military confrontation began to emerge between NATO and Russia. Economically, the US-led West adopted a series of economic sanctions against Russia, which severely affected Russian's financial realm and the development of real economy. The sanctions not only broke off Russia's financing channels in the West, but also prompted a large amount of capital (including overseas investment and domestic capital) to flee out of the country. There was a high demand for foreign currencies and the ruble met with massive selling.

1.4 The abandonment of the exchange rate corridor for the ruble accelerated the pace of depreciation

As the ruble continued to decline and was in an unstable condition, Russia's Central Bank announced on November 10 that it would abandon the exchange rate corridor for the ruble and limit interventions to allow the exchange rate to float freely. On October 25, Ksenia Yudaeva, First Deputy Governor on the Central Bank of Russia, indicated that the bank would abandon restrictions on the float of the ruble in an appropriate time, when she attended the international conference on the future of the European economy in Warsaw, Poland. She explained that given that the currencies of developing nations had not been affected by the Fed policies, the Russian Central Bank would make the ruble more flexible. However, the market did not expect that the proposal would soon become a reality. Although this was a fixed reform measure, its release at this key point was inappropriate. The Russian Central Bank claimed that the move did not necessarily mean that it would completely give up interventions for foreign currencies and when the country's financial security was under severe threat whether at home or abroad, the bank would undertake due measures. The Central Bank Governor Elvira Nabiullina said in a press conference, “Foreign exchange intervention is still at the bank's disposal, and will be used in case of threats to financial stability.” However, after months of intervention at the cost of a large sum of foreign currencies, the Russian Central Bank could hardly be able to control the rate of the ruble and could only let it flow freely. This enhanced the financial market's disappointment with the ruble, making the rate of the ruble lose balance and resulting in further depreciation.

1.5 International speculative capital boosted the process of ruble depreciation

History shows that when a country's currency experiences an upheaval,international speculative capital is always to blame. This is no exception for the ruble depreciation this time. During the ruble crisis, illegal speculative businessmen hyped up the incident and tried to profit from it. Although not as unbridled and rampant as when the British sterling and the Thai baht were hit, it was quite obvious that international speculative capital was involved. Russian President Vladimir Putin condemned and warned financial investors several times in public speeches. The spokesman for the central bank also criticized those who tried to manipulate the exchange rate of the ruble. Their words were indicative.

1.6 Gloomy domestic situation was the fundamental reason for the nose-dive of the ruble

The combination of the abovementioned factors imposed heavy pressures toward the ruble, which contributed to its steep fall. However, the fundamental reason was Russia's far-from-satisfactory economy. The economy had been in a state of stagnation and all walks of society lacked confidence toward the economic prospect. Without this factor, any other reason above could not cause such a sharp fall of the ruble. After the forceful intervention of Russia's Central Bank and the rise of international oil prices, the exchange rate of the ruble appeared to remain stable and showed an upward trend. However, after the disappointing macro-economic data was released, the ruble fell again, which fully reflected the direct and huge impact of the domestic economic situation on the ruble. After the 2008 global financial crisis, the Russian economy showed a temporary restorative growth, but the momentum gradually became weak. In 2013, the growth rate stayed at only 1.3 percent, followed by a worse situation—a rate of 0.6 percent — in 2014. According to prediction from the Ministry of Economic Development of the Russian Federation, the GDP of Russia in 2015 will decline by 0.8 percent. All these undoubtedly shook the confidence of ruble holders. Changing the ruble to other foreign currencies became a common practice by enterprises and citizens.