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The ruble has fallen to a 16-month low against the dollar as Russia’s surge in military spending and falling export earnings put pressure on a currency that has been plagued by Western sanctions and growing capital outflows.
Russia’s currency has lost about 25% of its value this year, falling above 101 rubles to the dollar in early Monday trading as a result of the war with Ukraine. The drop more than offset last year’s rise in the ruble as oil and gas prices surged following Russia’s initial invasion of Ukraine.
Russia’s central bank said on Monday it could raise key interest rates to stabilize inflation, but added that the ruble’s plunge did not threaten the country’s financial stability.
The ruble’s depreciation has accelerated in recent weeks as Western sanctions restricted capital inflows and European countries withdrew from Russia’s energy supply, reducing revenues from oil sales. increasing economic pressure.
The domestic economy has been boosted by government spending on defense and social initiatives such as “coffin payments” received by the families of soldiers killed on the Ukrainian battlefields. However, this also increased the budget deficit, resulting in currency depreciation.
The surge in spending led to a 20% increase in annual imports in the first half of this year.
Vladimir Milov, a former deputy energy minister and now an opponent of the Kremlin’s defection, said, “There is so little currency coming into the country that there is a currency hunger.”
“Imports have returned to pre-war levels, but now we import all consumer and industrial goods not from the West, but from China, Turkey, Central Asia and the Emirates. But no one wants the ruble.”
Last year’s sharp cut in interest rates added further downward pressure to the ruble. The Central Bank of Russia cut interest rates from 20% to 7.5% within a year.
“Government spending is a direct conduit to import growth, albeit with a slight lag,” said Natalia Lavrova, senior economist at BCS Global Markets. “Accommodative monetary policy has a similar effect over a longer time lag,” she said.
In one of the rare cases of criticism within the regime after the invasion, Russian propaganda hastily denounced the CBR. CBR head Elvira Nabiullina has been targeted by Russian hardliners for being “too liberal” in response to the weak ruble.
“What is going on in this country!?” How did this exchange rate come about? said Vladimir Solovyov, one of Russia’s most prominent state television hosts, referring to Russia’s presidential election next March.
Vladimir Putin’s economic adviser Maxim Oreshkin, a longtime opponent of President Nabiullina, said on Monday that “the Russian economy needs a strong ruble,” saying the central bank’s accommodative monetary policy was the reason for the devaluation of the ruble. I criticized it.
“The CBR has all the tools in place to normalize the situation in the near future and ensure that the pace of lending slows down to a sustainable level,” Oreshkin said in an opinion piece to state news agency TASS.
Trade flows have been the driving force behind the ruble’s volatility after foreign currency trading dried up last spring. Official figures released last week showed Russia’s current account surplus, roughly equivalent to the difference between imports and exports, fell by 85% in the first seven months of this year compared to the same period in 2022.
Pressure on the current account could further depreciate the currency and cause inflation due to higher import costs. Sophia Donets, chief Russian economist at Moscow investment bank Renaissance Capital, said the ruble “tends to stabilize above a current account surplus close to $5 billion.” The surplus fell to $1.8 billion in July.
Following last week’s decline, Russia’s central bank suspended a budget provision to buy and sell foreign currencies from sovereign wealth funds when oil and gas revenues are above or below certain levels.
But there is a glimmer of hope in Moscow. Revenues from Russia’s main exports, oil and gas, fell by more than 40% in the first seven months of this year compared to 2022 as prices fell due to embargoes and price caps imposed by the G7. However, it began to recover in July, exceeding RMB 800 billion for the first time since these measures took effect.
Economists said the suspension of the budget provision would remove incentives to weaken the ruble as the impact of high oil prices in recent weeks spills over to revenues.
Additional report by Hudson Rocket in Hong Kong
