The Ruble Crashes

Despite the Russian Fed’s dramatic rate increase, the ruble’s fall continues. The Russian currency dropped another 20% today. That’s on top of the huge fall this year. This is getting out of hand. At one point, the ruble was going for 80 on the dollar.

The currency market seems especially concerned about a mysterious bond offering from Rosneft, a major Russian oil company. The company is run by one of Mr. Putin’s old buddies from the KGB.

It’s still not exactly clear what happened, but this is my best estimate. In effect, Rosneft is using the Russian Fed as their personal piggy bank.

What happened is that Rosneft went on a buying binge, snapping up smaller rivals. Now they’re in debt which they can’t rollover due to sanctions. So Rosneft floated a 625 billion ruble bond which was bought by…someone, we’re not sure who. It was most likely some of the major state banks. The banks then deposited the bonds at the CBR in exchange for loans. That’s one large indirect way of the CBR printing rubles and giving them to Rosneft. This news did not go down well.

This is what’s referred to as monetizing debt (printing currency to pay for debts). The hitch is that you’re not really paying anything off; you’re just displacing it. You’re going to pay one way or the other, and this time it was in the form of a much lower currency.

Posted by on December 16th, 2014 at 8:51 am


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