Crisis in Russia as Ruble Plummets

December 16, 2014

The Russian ruble fell sharply in value last night, losing about a fifth of its value against the dollar. This came despite a substantial rate hike by the Russian Central Bank in an emergency effort to preserve the value of the troubled currency.

The main source of Russia’s economic trouble is the recent fall in worldwide oil prices. The U.S. is better than ever at producing oil, and at the same time, it is also becoming more energy-efficient. As these trends have materialized, the price of crude oil has fallen around the world. At the same time, Russia is facing sanctions due to its military and paramilitary action in Crimea and Eastern Ukraine earlier this year.

The ruble’s fall is the largest in sixteen years; sixteen years ago, Russia defaulted on its debt. Banks around the world may be wondering whether a repeat of the 1998 Russian financial crisis is coming.

One thing worth considering about these events is that dependence on a narrow revenue base can cause fiscal crises. The Russian state’s depends heavily on revenue from oil, and that revenue – as recent events show – is not a stable base. This is one of the reasons that sound tax policy draws revenue from broad bases; under a broad base, poor revenue from an individual sector does not result in fiscal collapse.

In addition to all of these concrete concerns, it seems like there is a more general collapse of confidence in the apparatus of Russia’s one-man, one-commodity state. There is, of course, much more to the world than just fiscal policy alone. When we talk about policy at Tax Foundation, we say things about which policies make states and countries better and worse off. We talk about what works to produce revenue, and what works to improve growth. But it’s worth remembering that economic expansions and contractions often happen through forces much more powerful than tax policy. Our recommendations are just ideas to make the good times more prosperous and the bad times more bearable.

We are keenly aware that the economy in 2015 will mostly be driven by factors other than tax policy: oil prices, deflation fears, the collapse of an economic regime representing 150 million people and much of the Eurasian continent. But tax policy is the problem we actually have the realistic potential to solve.


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