The Russian ruble faces significant turmoil, hitting its lowest point since March 2022, amidst sanctions and inflation pressures. The Central Bank of Russia (CBR) has intervened to stabilise the currency, halting foreign currency purchases until the end of 2024.
Ruble Hits Record Lows
The ruble weakened to 114 against the US dollar on Wednesday, marking its lowest level since Russia’s invasion of Ukraine. By Thursday, the intervention stabilised the currency slightly, with the ruble trading at 110 against the dollar.
Kremlin spokesperson Dmitry Peskov dismissed concerns, stating the decline would not impact ordinary Russians receiving salaries in rubles. However, experts warn of broader economic consequences.
Timothy Ash, a strategist at BlueBay Asset Management, described the situation as a “proper currency crisis in the making.”
Inflation Accelerates Despite High Interest Rates
The ruble’s collapse comes despite the central bank raising interest rates to 21% in October. Inflation remains stubbornly high, with price growth exceeding 8.5% in October. Basic food prices, including butter and potatoes, have surged, causing financial strain for Russian households.
“The central bank faces a dilemma: should it hike interest rates further, even though that lifts the risk of recession, or just accept higher inflationary pressure,” said Alex Isakov, BE’s Russia economist.
Experts anticipate another rate hike, with estimates suggesting an increase to 25%. Economist Natalia Milchakova noted, “A key rate hike in December was inevitable anyway, but now it should be at least twice as significant as the one percentage-point move previously expected.”
Sanctions Exacerbate Economic Struggles
The US recently sanctioned 50 Russian banks, further complicating Russia’s financial landscape. Sanctions targeting Gazprombank, Russia’s third-largest bank, aim to limit energy-related transactions involving the US financial system.
“For a few months now we have seen tighter sanctions … it is, as a result, becoming harder for Russia to transact foreign trade,” said Ash.
New restrictions have disrupted international trade payments, reducing exporters’ incentives to bring foreign exchange liquidity into Russia.
Pressure on Russian Economy Grows
The ruble’s value has dropped 35% since August, making it one of the worst-performing emerging-market currencies this year. The depreciation adds to inflationary pressure, which the Bank of Russia estimates at 0.5-0.6 percentage points.
However, VTB Bank PJSC, Russia’s second-largest bank, estimates the impact to be five times higher, intensifying inflation risks. “Recent events may lead to a revision of the future key rate trajectory,” said Dmitriy Pianov, VTB’s deputy chairman.
Economists warn the weakening ruble reflects deeper economic troubles. Joseph Brusuelas, an economist at RSM US, said, “The central bank has ended foreign FX purchases through the end of the year in an attempt to damp financial market volatility. The ruble is down 35% since August as inflation wreaks havoc in the domestic economy.”
Economic Outlook
Despite economic challenges, the International Monetary Fund (IMF) predicts Russia’s GDP will grow by 3.6% in 2024. However, it forecasts a slowdown to 1.3% growth in 2025 due to reduced private consumption and investment.
President Vladimir Putin has denied compromising economic stability for increased defence spending. Yet, rising inflation, sanctions, and the war effort continue to strain the economy.
Russian officials downplay the ruble’s decline, attributing it to global factors and sanctions. Maxim Reshetnikov, Russia’s Economic Development Minister, stated, “The current weakening of the exchange rate is not related to fundamental factors … there is currently an excessive emotional component on the currency market.”
Conclusion
The ruble’s collapse highlights mounting economic pressures in Russia. As inflation accelerates and sanctions tighten, the central bank faces tough decisions to stabilise the economy. Observers warn of long-term consequences if the currency crisis deepens.
