The fall in the ruble has occurred mostly since October. It has fallen against both the dollar and gold. Its decline closely tracks the decline in the price of oil. The oil price decline caused the ruble to fall, in my view. The ruble is a so-called fiat currency, like all other government currencies. But the term “fiat” is misleading. There is a backing to these currencies. They are not simply printed at will. The currency value is linked to the backing. What is that backing? It’s the acceptance by the issuing government of the currency as payment for taxes owed to the government. If tax collections rise relative to the amount of outstanding paper currency, the currency rises in value. If tax collections are very low for any reason, while the amount of paper currency outstanding remains the same or relatively high compared to those tax collections, then there is excess supply of currency and its value declines compared with a stabler standard, like the dollar or gold.
The oil price decline greatly weakens the Russian economy and lowers its collection of revenues via taxes. The amount of ruble notes remains the same. Ergo, the currency weakens too. The lesson here is that a fiat currency can suddenly break down or rise sharply if the tax collections depend on a commodity price. An undiversified economy and undiversified sources of taxes may cause this volatility in the currency.
4:30 pm on December 17, 2014
