The Russian Rouble Crisis of December 2014: Structure and Liquidity of a Foreign Exchange Market

We investigate the hypothesis that the Russian rouble crisis and the 40% change in the exchange rate in mid-December 2014 were caused by a large supply-demand imbalance in the foreign exchange market. Liquidity analysis shows that a $300 million imbalance usually resulted in a 1% price change and that the price change could have been even larger with the accelerated execution of transactions. Thus, the change in the exchange rate could have been caused by the accelerated purchase of $3–5 billion. Empirical analysis of exchange transactions indicates the existence of an imbalance, but its real size is difficult to assess due to the lack of data on off-exchange trades. The actions of the Bank of Russia during the crisis helped the market cope with the lack of foreign currency liquidity. The likelihood of recurrence of such situations in the future could be reduced if a system for monitoring imbalances is created in the foreign exchange market and mechanisms for automatically slowing down trading are introduced, such as temporary halts in trading or a switch to discrete auctions.