Russia’s ruble falls to lowest rate since early weeks of Ukraine war | Russia

Russia’s ruble has fallen to its lowest against the dollar since the first weeks of the full-scale invasion of Ukraine in the wake of new Western sanctions and growing geopolitical tensions.

The ruble hit 110 against the dollar on Wednesday for the first time since March 16, 2022. Before it launched its war against Ukraine in February 2022, the Russian currency traded around 75-80 against the US dollar.

The latest drop came days after the United States imposed sanctions on Gazprombank, Russia’s third-largest bank, which played a key role in processing payments for remaining Russian natural gas exports to Europe.

Previous rounds of sanctions had spared Russian gas because Europe’s economy was so dependent on it, but it is now far less dependent on Russian supplies. The Gazprombank sanctions raise the prospect of a further drop in gas revenues and foreign exchange for Moscow.

The weakening of the ruble threatens to erode Russians’ purchasing power by increasing the price of imported goods and could increase inflation further.

The country is already struggling with runaway inflation, which could rise to 8.5% this year – double the central bank’s target.

The Borscht Index, an online cost-of-living index that monitors the prices of four ingredients needed to make the traditional soup, reports a 20% increase compared to 2023.

The rising inflation caused the central bank last month to raise the interest rate to 21 per cent. — their highest level in more than 20 years — and a further increase is expected in December.

However, the weak ruble will also help the Kremlin prop up its budget – much of which comes from energy exports – to pay for the war in Ukraine and maintain public spending.

While Europe has significantly reduced its dependence on Russian energy, Moscow has successfully redirected much of its oil exports to markets in China and India.

In a rare official comment on the exchange rate, Russia’s finance minister, Anton Siluanov, suggested Moscow was content to let the ruble slide, saying Russia’s weak ruble benefited exporters, offsetting the negative impact of the central bank’s high benchmark interest rate.

“I’m not saying whether the course is good or bad. I’m just saying that today the exchange rate is very, very favorable for exporters,” Siluanov said at a finance conference in Moscow.

Russia’s economy has proven more resilient to international sanctions and the pressures of war than many Western officials expected. However, rising military spending and a growing labor shortage as working-age men go to the front or flee are raising concerns in Moscow about the strain on the economy and the long-term viability of sustaining a costly conflict.

Almost a third of Russia’s 2024 budget has been allocated to military spending, the highest level since the Cold War.

Analysts have said the country’s economy was beginning to show signs of stagflation – a combination of low growth and high inflation.

In a report published earlier this month, economists from the Institute of Economic Forecasting at the Russian Academy of Sciences write: said that “slowing economic activity and deterioration of financial indicators are becoming more and more evident in a number of sectors”.

Russian economists Alexander Kolyandr and Alexandra Prokopenko argue that the country’s militarization has stifled growth in other sectors of the economy.

“The only place where growth is still noticeable is in sectors linked to the military. Everywhere else in the economy, growth is absent, or at best anemic,” they wrote in a recent report.