Russia in panic as US sanctions trigger ruble collapse – DW – 28/11/2024

The Russian ruble has plunged to its lowest level against the dollar since the immediate aftermath of the full-scale invasion of Ukraine in March 2022.

The ruble hit 113 against the US dollar on Thursday. On Wednesday, Russia’s central bank announced it would stop foreign currency purchases to try to strengthen the currency and ease pressure on financial markets.

What is behind the currency plunge?

The ruble has fallen since late summer and is down by more than a third since August. Oil prices have fallen over the same period, hitting Russia’s ability to earn from its most important commodity.

It has put pressure on a war economy already struggling under the weight of rising inflation. President Vladimir Putin has dramatically increased military spending over the past 18 months in a bid to gain the upper hand in the war in Ukraine.

Defense spending has more than tripled since 2021 and is set to reach a record 13.5 trillion rubles ($122 billion, 102 billion euros) in next year’s budget, another huge 25% increase. The country’s central bank estimates that inflation reached 8.5% this year, which is twice the target. Interest rates are also at record highs, hitting 21% in October.

However, the sharp drop in the ruble in recent days is linked to sanctions that the US imposed on Gazprombank on 21 November. Gazprombank was one of the few major Russian banks not previously affected by sanctions and had become the main platform for Russian energy payments and its main gateway to the global financial system. Banning Gazprombank from the US-dominated global financial system limits the Kremlin’s capacity to finance its military and also makes it harder to receive revenue for its commodities, including gas, from its remaining European clients such as Slovakia and Hungary.

How Russia evades EU sanctions through a loophole

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The US has also moved to discourage foreign banks from doing business with Russia, warning them they could face secondary sanctions if they sign up to Russia’s so-called System for Transfer of Financial Messages (SPFS), the Kremlin’s alternative to the Western-dominated SWIFT system.

Chris Weafer, an investment adviser who has worked in Russia for more than 25 years, believes that the sanctions against Gazprombank could have “serious consequences” for the budget “if there are no solutions or waivers are not given by the United States” to some countries. “The Russian central bank is scrambling to find a way to deal with it. The evidence suggests that it is still looking for a solution,” he told DW.

Oleg Buklemishev, a Moscow-based economist, narrated the video podcast DW Novosti Show that recent developments are a reflection of the various pressures the Russian economy has been under since the invasion.

“The country suffering and shifting exports and imports from one direction to another bears colossal costs in logistics and sales,” he said. “It’s all insanely expensive. And at the same time, I’d say it’s naive to expect you and your currency to strengthen.”

What does this say about the state of the Russian economy?

Since Russia began dramatically increasing defense spending, experts have warned of the dangers of its war economy overheating. While the country has experienced strong GDP growth and record low unemployment as a result of the spending spread, inflationary pressures have increased.

Russia released new data this week that underscored some of the problems. Amid severe labor shortages due to workers sent to fight in Ukraine and the fact that over 1 million highly skilled workers left Russia due to the war, real wages rose 8.4% year-on-year in September .

The increase in incomes and expenses has caused the prices of essential consumer goods such as butter to rise so much that theft has become common. In many shops, butter is now sold in boxes with a padlock.

What has the government said?

The central bank said its decision to stop buying foreign currency “was taken to reduce volatility in financial markets.”

Economy Minister Maxim Reshetnikov said the ruble’s volatility was due to the strength of the US dollar and market concerns following the sanctions against Gazprombank. They were not the result of “fundamental factors” he told the Russian news agency Interfaxadding that the situation “will soon stabilize.”

There are suggestions that a weak ruble will suit Putin’s massive spending plans. A weak ruble means the Kremlin may have more domestic currency to spend, as its oil and gas exports are typically bought in foreign currency.

Russian Finance Minister Anton Siluanov hinted as much earlier this week. “I’m not saying whether the exchange rate is good or bad. I’m just saying that today the exchange rate is very, very conducive to exports,” he was quoted as saying by state news agencies.

A close-up of Russian Finance Minister Anton Siluanov
Russian Finance Minister Anton Siluanov said a weak ruble is good for exportsImage: AlexeixDanichev/SNA/IMAGO

Weafer said the government sees the ruble’s decline as a chance to convert foreign currency earnings into as many rubles as possible ahead of the huge budget increase in 2025.

“It wants to keep the budget deficit low,” he said, adding that he also believes they can see benefits in terms of making their exports, such as fertilizers, cheaper for potential buyers.

How is it likely to go from here?

Russia’s economy has defied gloomy predictions in the past. When the US, EU and UK imposed sanctions on Moscow in early 2022, leaders claimed it would cripple the country’s economy.

Russia’s economy stable despite war sanctions

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But its huge reserves of oil and gas gave it massive revenues throughout 2022, while its ability to avoid sanctions meant it was able to keep revenues healthy for most of 2023.

Although it took time to find ways to overcome sanctions, it has consistently been able to do so and may be able to do the same despite the recent Gazprombank sanctions. It has also deepened trade ties with China, India and others as European countries have largely turned away from its oil and gas.

However, there are reasons for Moscow to be concerned. The falling oil price has hit its main source of income. Meanwhile, experts say the latest data suggests the economy is overheating to a level dangerous to financial stability. This puts considerable pressure on the Kremlin to bring the situation under control as quickly as possible.

Weafer said the weak ruble will make the fight against inflation more difficult for authorities to manage. However, he warns that every time the ruble has fallen in the past, the government has eventually intervened to correct the course. “We may see it again before the end of the year,” he said.