Companies have many precedents when it comes to currency collapses. Peso anyone?
The collapsing Russian ruble unfortunately has many precedents. One of which was almost exactly 20 years ago when the Mexican peso took a dive, shedding nearly 40 percent of its value in a “maxi-devaluation.”
After elections in August of that year, the new government decided to devalue the currency on December 20, 1994. According to a study by the Atlanta Federal Reserve Bank, the devaluation was the result of a variety of things, including the currency being overvalued, a weakening economy and a swelling current account deficit. Also factoring in were “elements of a self-fulfilling speculative attack that was not required by the usual economic fundamentals, such as current and prospective budget deficits.”
This week’s drop in the ruble has been attributed to sliding oil prices and the effects of Western sanctions imposed following Russia’s Ukraine adventures. With about a 20 percent drop in value in the last few days, companies no doubt are taking a hard look at what it will mean to their business. Russia after all is the world’s sixth-largest economy, so for some companies it may mean a pullback in expansion in the country while for others, like consumer goods and energy companies, it could have an impact on earnings.
Back in August of 1994, companies had some inkling of what was in store for the peso, and acted accordingly, hedging where needed or pulling cash out of the country as early as the summer before. But, as International Treasurer wrote in January 1995, there remained concerns. “[E]ven those who managed their hedges perfectly now have to come to terms with operations in Mexico that will be in for hard economic times until at least 1996,” International Treasurer wrote in, “Mexico’s Maxi” the January 9, 1995 edition.
That could certainly be mimicked with the ruble these 20 years later. “The fall of the Russian ruble portends rough seas ahead for multinational corporates,” writes Wolfgang Koester, CEO at currency analytics company FiREapps in a recent blog post. “It is the kind of crisis that will separate the effective risk managers from the rest – rewarding those corporates that can manage through intense volatility, and punishing those that can’t.”