The ruble fell sharply, especially after the US imposed sanctions on Russia's Gazprombank. What does this collapse mean for the Russian economy and what are the possible consequences.
The Russian ruble has depreciated against the dollar, falling to levels not seen since the massive collapse of the Russian national currency in the early days of the February 2022 invasion of Ukraine. On Tuesday (December 3), the rate was just over 106 rubles to the dollar – from 113 rubles per dollar last week. In order to strengthen the national currency, the Russian Central Bank suspended purchases of foreign currency on November 27.
What is the reason for the big drop in the Russian ruble?
The current devaluation of the ruble began at the end of the summer. Then oil prices also fell, which was a heavy blow for Russia, whose main export commodity is precisely oil. This has put pressure on the Russian economy, which many experts are now calling a “war economy” and which is experiencing serious difficulties due to high inflation. Over the past 18 months, Russian authorities have sharply increased defense spending in an attempt to gain an advantage in the war against Ukraine: from 2021 so far they have increased more than three times, and in the 2025 budget will reach a record 13.5 trillion rubles (about 102 billion euros) - 25% more than in the current year.
The Russian central bank estimates that inflation this year will be 8.5%, which is twice the target level. The interest rate is also record high - in October it reached 21%. Many observers, however, explain the sharp decline of the ruble in recent days with the sanctions imposed by the US on Gazprombank on November 21.
This bank has remained one of the few major financial institutions in Russia that has so far not been subject to restrictions, as it is a key payment platform for Russian energy resources. Its inclusion on the US sanctions list effectively means that this bank will no longer have access to the US-dominated global financial system, which in turn will limit the Kremlin's ability to finance the military and make it harder to collect revenue for export goods, including gas , from his other European clients such as Slovakia and Hungary.
Sanctions and Russia
At the same time, the United States is trying to dissuade foreign banks from doing business with Moscow, warning them they could face additional sanctions if they link to the FSB, the Kremlin's own "Financial Transmission System". messages“, an alternative to the western SWIFT. According to Chris Weafer, an investment consultant who has worked in Russia for over 25 years, sanctions against Gazprombank could have “serious consequences” for the Russian budget - unless workarounds are found or the US accepts exceptions for some countries.
Moscow economist Oleg Buklemishev believes that the latest events are a reflection of the various pressures that the Russian economy has been under since Russia invaded Ukraine - Western sanctions, the need to constantly redirect exports and imports, the huge costs of logistics and sales ... All this is insanely expensive“, he assures.
What does the depreciation of the ruble indicate about the state of the Russian economy?
Since Russia began to sharply increase its defense spending, experts have warned of the danger of its economy overheating. Although the country is experiencing high GDP growth and record low unemployment, inflationary pressures are intensifying due to a sharp increase in spending.
This week, Russian authorities released new data that clearly outlined some of the problems. Amid severe labor shortages due to the mobilization for the war against Ukraine and more than 1 million people who have fled Russia because of the war, real wages in the country rose by 8.4% year-on-year in September. The increase in household income and expenditure has led to a significant increase in the prices of some important foodstuffs such as butter, for example. Accordingly, the theft of this type of product has increased, and some stores now keep the oil in closed cabinets.
What do the Russian authorities say about the fall of the ruble?
Economy Minister Maxim Reshetnikov said that the fluctuations in the ruble exchange rate were caused by the strengthening of the dollar and fear in the markets after the imposition of US sanctions on Gazprombank. According to him, what is happening is not the result of “fundamental factors”, and the situation would soon stabilize.
Some observers believe the weak ruble is in line with President Putin's plans to increase government spending. A weaker ruble means the Kremlin could have more funds in the national currency, as Russia typically sells oil and gas for foreign currency.
The Russian government sees the falling ruble as a chance to convert foreign exchange earnings into as many rubles as possible before a massive budget increase in 2025, according to investment consultant Chris Weafer. “It wants to maintain a low budget deficit, and in addition, the authorities may also see benefits in making Russian exports cheaper, for example fertilizers, to make them attractive to potential foreign buyers, adds the expert.
What next for the Russian ruble?
The Russian economy has previously refuted gloomy forecasts for its development. When the US, EU and UK imposed sweeping sanctions on Moscow after February 2022, Western leaders argued it would be a severe blow to the Russian economy. However, its huge oil and gas reserves have provided it with huge revenues throughout 2022, and ingenuity in circumventing sanctions has allowed it to maintain high levels of income for most of 2023. It is possible that Russia will find a way to circumvent the restrictions imposed on Gazprombank as well. Moscow has also expanded its trade with China, India and other countries after European countries largely abandoned Russian oil and gas.
Regardless of this, it seems that this time the Russian Federation has reason to worry. Falling oil prices have hit its most important source of revenue. At the same time, according to a number of experts, the latest data indicate that the economy has overheated to a level that is dangerous for financial stability. All this puts considerable pressure on the Kremlin to get the situation under control as soon as possible. The weak ruble will make it harder for the authorities to fight inflation - says Christopher Weafer. However, he also recalls that every time the ruble was in trouble, the government intervened with adjustments to the exchange rate. “It is possible that it will happen again now – even before the end of the year”, says the financial analyst.