The Russian ruble dropped to 113 against the US dollar on November 28, its lowest level since the start of the war in Ukraine.
It has since rallied slightly to 105 on December 4, but the ruble is still down around 8% against the dollar over the past month. This is not a one-off event; it is part of a developing crisis that is affecting Russia’s economy.
Russia’s currency has been highly volatile since its troops invaded Ukraine in February 2022. The initial collapse, which saw the ruble lose one-third of its value by March compared with the start of the year, was due to the exodus of capital from the country following the introduction of Western sanctions.
Capital flowing out of Russia made the ruble more readily available on the foreign exchange market, hence causing its value to depreciate.
In response, Russia’s central bank implemented strict capital-control measures to stabilize its currency. The measures included mandating that exporters convert 80% of their foreign currency earnings into rubles, as well as limiting foreign currency withdrawals for individuals to US$10,000.
By the middle of 2022, when energy prices were rising, Russia had found ways to circumvent the sanctions and export much of its oil and gas to countries like China and India.
Russia benefited from strong export revenues and the ruble temporarily recovered its value. The capital controls also artificially boosted demand for the ruble, making it one of the best-performing currencies of the year.
However, falling energy prices and tighter sanctions in 2023 caused a drop in Russia’s export revenue. The G7 countries, the EU and Australia imposed a cap on the price of Russian oil, which led to decreased foreign currency inflows and thus a reduction in the value of the ruble.
The November 2024 slump is, at least in part, still the result of these factors. Key issues include the continued decline in export revenues due to sanctions and the G7 oil price cap, as well as the impending end of pipeline gas supplies to Europe via Ukraine in 2025.
But new US sanctions, which came into effect on November 21, have worsened the situation. Gazprombank, one of the few major Russian lenders that had yet to be targeted, as well as 50 small- to medium-sized Russian banks, 40 local Russian registrars and some Russian central bank officials have all now been cut off from doing business with the US and its allies.
This limits transaction gateways, so buyers of Russian oil and gas will again have to find new ways to do business, as they did in 2022. The market expects these sanctions to reduce the flow of foreign currency towards Russia, consequently making the rouble depreciate.
The Bank of Russia has intervened by suspending all foreign currency purchases in the domestic market until the end of the year. This will stabilize the exchange rate, albeit artificially. However, trading will continue on the black market.
More instability ahead
A volatile and weaker ruble will discourage domestic and foreign investment, as investors prefer to transact with a strong and predictable currency.
It will also encourage people to move their capital out of the country, as it has since the war began, so the central bank will be forced to use its reserves to defend the ruble. But Russia is already constrained by limited foreign currency inflows and high spending demands – a vicious cycle that will further weaken its currency.
A weak ruble also raises the cost of importing goods or materials. The profit margins of import-dependent businesses will be reduced unless they pass the increased costs onto consumers – something that is relatively easy to do in Russia where there is minimal market competition.
This drives inflation for imported items like food, medical supplies, machinery and energy. Russia imported over $81 million worth of electricity in 2022, primarily from Lithuania, Kazakhstan, Latvia, Azerbaijan and Mongolia.
And it imports certain refined petroleum products, too. The annual rate of inflation in Russia was estimated at 8.4% in October – twice the central bank’s target – and is not expected to fall before the end of the year.
Russia’s president, Vladimir Putin, and his economy minister, Maxim Reshetnikov, claim there is no need for emergency steps to support the ruble. Reshetnikov has said the ruble’s volatility is due to the global strength of the US dollar and predicted that market concerns following the latest sanctions would soon stabilize.
But failure to act decisively risks further depreciation, which will only reduce confidence in the ruble even more. Analysts expect the central bank’s current interest rate of 21% to rise to stabilize the ruble and curb inflation. However, raising the rates will probably slow the economy.
There is plenty for Putin to be concerned about. Falling export revenues, inflation and strained reserves all weaken Russia’s fiscal stability. And it looks as if Western economic sanctions are now having a significant effect on Russia’s ability to counter its economic difficulties.
The administrators of Putin’s regime will argue that a weaker ruble is more favorable to them during the war. Converting stronger foreign currencies from energy exports will give the Kremlin more domestic currency to plug the government’s widening deficit.
Despite this, Russia’s currency crisis has exposed deep problems in the economy. It relies heavily on energy exports, has limited economic diversification and has a weak financial sector.
Over the longer term, sanctions will also isolate Russia further and limit its economic autonomy because Putin will have no choice but to rely on doing business with a few trading partners, such as China and India.
Nasir Aminu is senior lecturer in economics and finance, Cardiff Metropolitan University
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Asia Times Editor’s note: Ruble rates were updated for latest available data.
Jakos dziwnym zbiegiem okolicznosci “expert” nie zauwazyl jaki wplyw na Europe maja sankcje.
I’ve been reading articles predicting imminent economic collapse in Russia for three years now. Admittedly this one is not predicting collapse, just a host of troubles. War economics is different, it is about resources allocation and production, finance and taxation only to facilitate. Most of Russia’s war costs are roubles denominated, which is to say that production and materials are mainly domestic. And the stuff that isn’t has been covered by export earnings thus far. Going forward, if the trade balance goes into deficit they can cut non-essential imports,—the rich to drink beer instead of champagne, and the people mend their clothes. Thus far sanctions have had negligible effect on Russia’s war effort, nor are they likely to in the future.
Sanctions suffer from the law of diminishing returns. The more you abuse, the blunter they become. The problem for the West is ideological. Their foreign policy establishments are full of halfwits screaming off the hill, that the problem is always “over there” and never “over here”.
Second place in the lottery of life again.
The West has the money, the rest do not
Nobody can eat money. And btw. Russias relies on energy exports is not new. They had plenty of time to be prepared.
The West doesn’t have the money. They just borrow it or print it. Sooner or later, the West will get drowned in debt or face hyper inflation and currency devaluation.