After eight straight days of currency devaluation due to slumping oil prices, Russia’s central bank decided to intervene in the markets last week by injecting liquidity and selling currency.

Currency values have dropped to 2009 levels, a result, some believe, exacerbated by the European crisis and the Russian population’s concern of another financial collapse.

The central bank’s intervention is not expected to halt or reverse the current trend but if oil prices continue to plummet, the ruble’s decline will be less dramatic.

Current market trends — lower currency pricing and relatively strong oil valuation — have created a positive environment for Russia’s oil companies. The ruble has managed the remarkable feat of falling against the euro in recent months, the only major currency to do so.

Analysis

Russia walks a fine line between political stability, export competitiveness and capital flight.

The weakening demand for energy exports in China and Europe as well as increase in production in Iraq and the United States have quickly shown the weakness of the post 2001 Russian economic boom. The ruble’s quick fluctuation cannot come at a worse time for the Russian government which has seen instability in the elite and among a growing middle class. A further weakening of the ruble’s purchasing power will continue to alienate powerful constituencies, especially since Russia imports many of its consumer goods from overseas.

A weak ruble may also cause substantial capital flight from the country, in which this is already a problem. Many Russian corporations use “brass plate” entities registered in Cyprus and Malta to avoid paying taxes and preserve their property rights. A weakening ruble will only increase these practices as Russian companies look to invest their assets in foreign entities (most likely backed in American dollars) in order to avoid losing their assets.

This creates two possible political outcomes. It could pose a threat to the government’s strategy of economic stability and independence as Russia begins to lose control over its currency and increasingly depends on dollars (and possibly euros) for its commerce or it may accelerate the Kremlin backed strategy of increasing Russian investments in Baltic and East European firms in order to make Russian companies larger players in the region’s economies.

Wikistrat Bottom Lines

Opportunities

• A weak ruble may mean increased Russian investments in the gobal economy and an increase in the trend of Russian IPOs on Western financial markets, further integrating Russia’s economy with that of Europe.
• A weakening ruble could cause Russia to finally make some hard choices about loosening the political prominence of the energy sector and could make Russian nonenergy exports more competitive.

Risks

• A further freefall in the value of the ruble could prompt the collapse of the social order generated by President Vladimir Putin as Russian consumers see prices on imported goods increase.
• Russian finances would worsen as more and more firms place their profits overseas.

Dependencies

• The resolution of the European debt crisis could spur an increase in growth that will drive up the demand of energy prices adding value to the ruble.
• A conflict in the Persian Gulf that threatens the transit of oil will make Russian energy exports more competitive and thus increase the value of ruble backed assets.

Lorraine Consigny, Jacob Feygin, Patrick Hall, Sebastiano Lustig, Simon Mills, Wai-hoi Tsang and Imogen Davidson White contributed to this analysis.