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

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

The ruble traded 113 points against the US dollar on Thursday. On Wednesday, Russia’s central bank announced it would halt foreign currency purchases in an effort to strengthen the currency and ease pressure on financial markets.

What’s behind the currency drop?

The ruble has been falling since late summer and has fallen by more than a third since August. Oil prices have fallen over the same period, affecting Russia’s earning capacity from its key commodity.

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

Defense spending has more than tripled since 2021 and is expected to reach a record 13.5 trillion rubles ($122 billion, €102 billion) in next year’s budget, another massive 25% increase. The country’s central bank estimates that inflation will reach 8.5% this year, doubling its target. Interest rates are also at record highs, reaching 21% in October.

However, the sharp fall in the ruble in recent days is related to the sanctions imposed by the US on Gazprombank on November 21. Gazprombank was one of the few major Russian banks not previously hit 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 ability to finance its military and also makes it harder to collect revenue for its raw materials, including gas, from its remaining European customers such as Slovakia and Hungary.

The United States has also taken steps to discourage foreign banks from doing business with Russia, warning them that they could face secondary sanctions if they join Russia’s so-called Financial Message Transfer System (SPFS). the Kremlin’s alternative to Western banks. dominated SWIFT system.

Chris Weafer, an investment adviser who has worked in Russia for more than 25 years, believes the sanctions on Gazprombank could have “serious budget implications” “if solutions are not found or US waivers are not granted” to some to land. . “The Russian central bank is trying to find a way to deal with this. The evidence shows that she is still looking for a solution,” he told DW.

Oleg Buklemishev, a Moscow-based economist, said in a video podcast DW Novosti Show that the latest developments reflect the different pressures the Russian economy has faced since the invasion.

“The country, which is suffering and shifting exports and imports from one direction to another, is bearing colossal costs in logistics and sales,” he said. “It’s all crazy expensive. And at the same time, I would say it’s naive to expect you and your currency to get stronger.”

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 overheating the war economy. While the country has seen strong GDP growth and record low unemployment due to massive spending, inflationary pressures have increased.

Russia published new data this week that underlined some of the problems. Amid severe labor shortages as workers were sent to fight in Ukraine and more than 1 million highly qualified workers leaving Russia because of the war, real wages rose 8.4% year-on-year in September.

The rise in incomes and spending has caused the prices of key consumer goods such as butter to rise so much that theft has become commonplace. In many stores today, butter is sold in padlocked boxes.

What has the government said?

The central bank said its decision to halt foreign currency purchases “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 after the sanctions against Gazprombank. They were not the result of “fundamental factors,” he told Russian news agency Interfaxadding that the situation would “stabilize soon.”

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

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

Weafer said the government sees the ruble’s decline as an opportunity to convert foreign exchange 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 thinks they can see benefits in making their exports, such as fertilizers, cheaper for potential buyers.

How is it likely to go from here?

The Russian economy has defied gloomy forecasts before. When the US, EU and UK imposed sanctions on Moscow in early 2022, leaders claimed it would cripple the country’s economy.

However, its vast oil and gas reserves earned the country huge revenues in 2022, while its ability to evade sanctions allowed it to keep revenues healthy through much of 2023.

While it took time to find ways around sanctions, the country has consistently succeeded and may be able to do the same despite Gazprombank’s latest sanctions. It has also deepened trade ties with China, India and others as European countries have largely turned away from their oil and gas.

However, there are reasons why Moscow is concerned. The falling oil price has hit his main source of income. Meanwhile, experts say the latest data indicate the economy is overheating to levels dangerous for financial stability. That puts significant pressure on the Kremlin to get the situation under control as quickly as possible.

Weafer said the weak ruble will make the fight against inflation more difficult for authorities. However, he warns that whenever the ruble has fallen before, the government has eventually intervened to correct the rate. “We might see it before the end of the year,” he said.