NEW YORK (TheStreet) -- If the market were to write a letter to the Russian president, it would begin like this: "Dear President Putin. It's not the ruble. It's you."
The ruble's ride has been unbelievable. In the space of a few hours on Tuesday it went from 64 to 70 to the dollar -- then it broke 80. It currently trades around 61 after rumors that the central bank was buying the ruble to prop it up.
As long as the price of oil remained relatively high, it looked like Russia could do no wrong (or nothing wrong enough to warrant a currency crisis). Invading a neighbor and almost causing its economic collapse was not enough for investors to sell its currency. But the rapid fall in the oil price surfaced a lot of unpleasant truths about Russia the markets had somehow managed to ignore.
First of all, of course, it's the geopolitics. Not just in Ukraine but elsewhere in the region, Vladimir Putin's Russia has bullied smaller countries, preventing them from forging closer ties with the European Union and NATO, all the while blaming the West for attempting to gain influence over what it still sees, anachronistically, as its region of influence.
Until recently, the Western sanctions had little effect on the country, which has strong foreign exchange reserves and is an exporter of the commodity that, until a few weeks ago, was very much coveted.
All that is unwinding now. The Russian central bank's panicked 6.5 percentage points rate hike to 17% overnight contributed even more to the market's fears, as it is now becoming obvious that normal monetary policy measures will not work to keep the ruble in check. Investors worry that this will bring about the introduction of capital controls to stop the outflows of money and are taking their cash out while they still can.
There was also a negative surprise about industrial output -- it fell 0.2% in November vs. expectations of 1.2% growth -- that contributed to the market panic. Manufacturing output led the decline, with a 3% fall, highlighting the difficulty for the central bank to keep monetary policy tight to defend the ruble in a weakening economy.
Adding to this was the vote in the U.S. Congress to give President Obama the authority to impose new sanctions against Russia or third-country companies that could be considered to be in breach of the existing trade and financing sanctions. The news was negative for the Russian financial market, said Bank of America Merrill Lynch analyst Vladimir Osakovskiy. He warns that the ruble and other Russian assets could see increased pressure on concerns about possible escalation of tensions and Russia's response.
At the end of the day, it is all down to Putin. The thing with presidents in that part of the world (maybe more than in others) is that they are followed, listened to and even revered -- until they are not. After decades of communist dictatorships, the social conditioning is still to see the president as the all-powerful father figure who decides on nearly everything in the country. Normally, the president enjoys almost complete confidence from the people. But when that begins to go, it goes down very quickly.
Putin had been riding on a wave of high oil prices and low global interest rates, which had anesthetized investors to the real problems that Russia faces under his reign, but now the painkiller has stopped working. Reuters reports that Putin approved the massive overnight rate hike by the central bank. The Kremlin did not comment but if the report is true, it shows the extent to which he is involved in Russia's economy.
The ruble's trouble is deeper than that of the currencies of other oil-exporting countries because of Russia's geopolitical issues. Investors feel that, as long as Putin maintains his current stance abroad and strong grip at home, their capital is much safer elsewhere. That's what's driving the ruble's selloff -- not oil.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.