The Russian Rouble Crisis of December 2014: An Alternative View

This paper looks into the causes of the crisis in the Russian foreign exchange market that occurred in December 2014. At the macroeconomic level, these include the decline in oil prices coupled with the massive repayment of foreign debt and the significant demand for foreign currency from households. In terms of flows in the foreign exchange market in mid-December, this was reflected in high demand for foreign currency from Russian banks seeking to satisfy their customers' orders to purchase foreign currency, while the supply was limited due to a reduction in sales of foreign currency by exporters and the halt of foreign exchange interventions by the Bank of Russia. All this eventually contributed to the disruption of the normal operation of the foreign exchange market on 16 December, when insignificant fluctuations in the demand for foreign currency caused a considerable change in the exchange rate at minimum trading volumes. The subsequent normalisation of exchange rate movements was achieved by raising the key rate to 17%, which stabilised expectations for the exchange rate and inflation, as well as FX repos, the volume of which later grew significantly. Thus, explanations of the rouble volatility in December 2014 based on the analysis of the microstructure of the foreign exchange market and explanations looking at the macroeconomic reasons underlying those events are mutually complementary hypotheses rather than competing ones.