Does the ruble's rocky past foretell its future?

The Russian ruble is in a practically unprecedented free fall for a country of its economic standing. The currency has lost over 50 percent of its value against the dollar in the past year – 20 percent of that in just the past two days.

The immediate triggers for the ruble's weakness are well understood: The over 40 percent decline of global oil prices this year and the US-led sanctions imposed on Russia after it invaded and annexed Ukraine's Crimea region in March.

But the structural weaknesses of Russia's economy – producing few goods the world wants beyond oil and weapons; the corruption and legal uncertainty that makes starting a business there a worse bet than putting your savings on the spin of a roulette wheel; and the outsized role of oligarchs close to the Kremlin – are at the heart of the financial instability built into the Russian system.

Yet as recently as two years ago you could find analysis pieces in places like Forbes arguing that Russia's "overall economic and fiscal outlook is ... surprisingly robust," while at the same time that the "robustness" was reliant on persistently high oil prices.

But oil prices have never been persistently high. Since its emergence as the globe's dominant form of energy, it's been a highly volatile commodity (as most are). Betting on price increases to infinity and beyond has always, eventually, been the way to lose a bundle. This was the year that the commodity cycle bear showed its teeth, and Russia was, yet again, ill-prepared. The Kremlin is counting on oil prices back around $100 in 2015 to balance its books which might happen. Or might not.

Russia's central bank says foreign exchange reserves are now around $370 billion – among the fourth largest in the world. But that's down from $470 billion at the start of the year – a decline of over 20 percent. And that money has hardly done anything to shore up the ruble, which has been a terrible store of value since its last major devaluation in 1998.

That year, fears of bank defaults and the spreading distrust of emerging markets (after the collapse of Asian currencies like Indonesia's rupiah and Thailand's baht), saw massive capital flight from Russia. In August 1998, the interest rate on corporate bonds surged to 200 percent and the government suspended debt payments by Russian banks to foreign creditors for 3 months.

It didn't do the ruble, then under a managed float system, much good. The central bank widened its trading band for the ruble from between 5.3 to 7.1 to the dollar to between 6 and 9.5. The ruble immediately pegged itself to the weaker end of that range, and by the end of September, Russia had given up. The currency ended the year at at more than 20 to the dollar, and inflation in 1999 topped 80 percent. 

The highly volatile ruble is today trading at around 70 to the dollar, leaving it worth around a quarter of what it was worth after the devaluation 15 years ago. Put another way, foreign investors in Russia would have had to see their bets quadruple in value in the past 15 years just to be breaking even. And while the oil wealth and military might of Moscow means it casts a long shadow on the world stage, compare that the performance of the Indonesian and Thai currencies in the same time period: Both the baht and the rupiah are today worth more than they were at their 2008 low points. 

Will this time be different? To be sure, the world, and Russia, are different places.

But the Russian central bank says that Russian companies have $40 billion in foreign debt coming due in the first half of next year, and a total of $77 billion due by the end of 2015. The central bank already intervened last week to help Rosneft, an oil company controlled by an oligarch close to President Vladimir Putin, repay a $7 billion loan coming due on Dec. 21. The company owes another $20 billion coming due in 2015.

And while the oil companies earn in dollars, their need to repay debts in dollars will mean far less of their earnings will be converted to rubles than Russian bankers would have hoped, putting more pressure on the currency. The central bank's increase of interest rates to 17 percent isn't going to prove much of an enticement to these business to buy rubles now, because the downside risk is too great.  But it will hurt the very domestic businesses it wants to see flourish by increasing corporate borrowing costs and decreasing domestic demand.

For companies that earn in rubles but owe in dollars, euros, or yen, the problem is clear. While higher interest rates may see international bankers roll over some of that debt, all will not. And Russian treasury departments, at least responsible ones, will be looking to hedge against that – meaning they're getting into the market for dollars now, putting more pressure (again) on the domestic currency.

This will not necessarily lead to catastrophe, as it did in 1998. Moscow appears to be hoping that domestic industry will be spurred by lower labor costs and the soaring price of imports. But one major question mark is the stability of the banking system. Russians – from the wealthy to average folks who just have a little bit of money squirreled away – have watched the value of their savings plummet this year. The temptation to buy dollars or euros now, before things get worse, is powerful – and can lead to a negative self-reinforcing cycle of bank runs.

Bloomberg reports today that Russia's second largest private lender says demand for foreign currencies today and yesterday was three to four times the average, and quotes Vitaly Kupeev at Allianz Investments in Moscow: "The population has already started to panic. The central bank is left with limited measures to defend the ruble."

How strong is the panic at the moment? Consider this picture shared by an AP reporter in Moscow:

Currency rates in Moscow's exchange offices now pic.twitter.com/NP9Pu7nuB0

— Alexander Roslyakov (@RoslyakovAP) December 16, 2014

That "70" is how many rubles that currency exchange will give you for a dollar, and the 80 is how many rubles it will cost to buy a dollar. A 14 percent spread is vast. Typically at retail currency exchanges like that you see spreads of about 1.5 percent.

And before the Kremlin haters out there start chortling about Putin and Russia's woes: A Russian economic collapse with Europe still in tepid recovery; other emerging markets prone to the investor herd effect known as "contagion"; and a Kremlin leader whose rhetoric of national greatness seems tied up in flexing his military muscles abroad, are not a recipe for success for anyone.