Aerial view of the Moscow Kremlin landmarks: St. Basil’s Cathedral, Kremlin, Spasskaya Tower and Red Square
Sergey Alimov | Moment | Getty Images
Russian authorities are trying to stem panic over the ruble’s sharp fall this week, with the central bank forced to intervene on Wednesday to support the currency.
The ruble weakened to 114 against the greenback on Wednesday, hitting its lowest level since March 2022, shortly after Russia invaded Ukraine.
Russia’s central bank (CBR) was forced to intervene on the day to prop up the ruble, saying it would halt foreign purchases on the domestic currency market for the rest of the year “in order to reduce the volatility of financial markets.”
Following the intervention, the ruble was trading at 110 against the dollar on Thursday morning.
Kremlin Spokesman Dmitry Peskov appeared dismissive about the decline on Wednesday, telling one reporter that it wouldn’t affect ordinary Russians because they receive their salaries in rubles, according to a Google-translated report from Russian media.
U.S. dollar/Russian ruble FX spot rate
Close followers of Russian geopolitics and macroeconomics say the weakening ruble points to a fast-deteriorating economic situation for Moscow.
Describing the ruble as being “in free fall,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, said there seemed to be a “proper currency crisis in the making in Russia.”
“A weaker ruble means higher inflation, higher CBR policy rates as a response and lower real GDP growth as a result,” Ash said in emailed comments.
The ruble’s collapse has been partly attributed to a raft of new U.S. sanctions against Russia’s Gazprombank that were announced by the White House last week, as well the war-focused domestic economy that has prompted inflation to rocket.
The central bank has already raised interest rates to 21%, but this has so far failed to tame rampant price increases, with the inflation rate at 8.5% in October, while the price of basic foods, such as butter and potatoes, has soared over the past year.
The government has blamed the high cost of living on sanctions imposed on Russia by “unfriendly” countries in a bid to deflect from its war against Ukraine, with the conflict meanwhile causing labor and supply shortages and pushing up wage and production costs.
Despite rising price pressures taking place against a backdrop of massively-increased defense spending and ramped-up domestic weapons production, Russian President Vladimir Putin has denied swapping “butter for guns.”
Russia’s economy has still managed to grow during the war, largely thanks to Russian oil and gas exports to a handful of countries that have been willing to turn a blind eye to the conflict. The International Monetary Fund made an upward revision to its GDP forecast for Russia in its fall economic outlook, now predicting 3.6% growth in 2024.
It nevertheless noted an economic deceleration, forecasting 1.3% growth in 2025 and stating that this reflected “a sharp slowdown … as private consumption and investment slow amid reduced tightness in the labor market and slower wage growth.”
‘Crisis in the making’
The ruble’s devaluation comes as the Biden administration makes last-ditch attempts to pile pressure on the Kremlin ahead of President-elect Donald Trump’s inauguration in January.
The latest round of sanctions targeting Russia’s third-largest bank, Gazprombank, are seen as particularly painful for Russia, as they prevent the financial institution from handling any energy-related transactions that involve the U.S. financial system. The U.S. Treasury also accused the bank of being a conduit for Russia to purchase military materiel for its war effort against Ukraine and to pay Russian soldiers.
Russian conscripts called up for military service sit in a bus before their departure for garrisons, in Bataysk in the Rostov region, Russia November 16, 2024.
Sergey Pivovarov | Reuters
The White House had been wary of sanctioning the bank before, since it’s also used to receive payments from European buyers of Russian natural gas — but most of these consumers have looked to greatly reduce their Russian gas purchases since the war started.
“For a few months now we have seen tighter sanctions — sanctions on [the Moscow stock exchange] MOEX, OFAC [the U.S.’ Office of Foreign Assets Control] cracking the whip around secondary sanctions and now Gazprombank sanctions. It is, as a result, becoming harder for Russia to transact foreign trade,” BlueBay Asset Management’s Ash noted.
Economists say there’s no doubt that the war, and Western measures designed to punish Russia for its invasion, are starting to really hit home.
“One would think two years of sanctions is starting to wreak havoc on the Russian economy,” Joseph Brusuelas, chief economist at RSM US, commented Wednesday, as the ruble fell further.
Russia’s economy appeared to be “an overheated economy that is struggling to support its war effort [and] exhausts its resources,” he said in comments posted on X, noting that the central bank appeared to have run out of “unorthodox steps to avoid the obvious endgame in which it stops buying foreign currencies, which started today.”
“The central bank has ended foreign FX purchases through the end of the year in an attempt to damp financial market volatility. The ruble is down 35% since August as inflation wreaks havoc in the domestic economy [and] as the Kremlin makes a fateful choice of guns vs. butter,” he said, urging observers to “watch this space for signs of a broader economic troubles as inflation soars higher and prices on the black market tell a very different tale of a wartime economy on the verge of collapse.”
Russian President Vladimir Putin speaks with Kremlin spokesman Dmitry Peskov during a summit of leaders of nations, which are members of the Commonwealth of Independent States (CIS), in Moscow, Russia October 8, 2024.
Sergei Ilnitsky | Via Reuters
Russian officials have been quick to downplay the ruble’s drastic weakening and to once again blame sanctions for the decline.
On Wednesday, Maxim Reshetnikov, the head of Russia’s Economic Development ministry, told reporters that the dynamics of the ruble exchange rate were not determined by “fundamental factors.”
“The current weakening of the exchange rate is not related to fundamental factors, we see that the trade balance is strong,” he said, according to Google-translated comments reported by Russian news agency Interfax reported.
“The main factors of weakening are the strengthening of the dollar against world currencies and …. the backdrop of yet another tightening of sanctions against the Russian Federation,” he told journalists in Astana. “In addition, as often happens in such situations, there is currently an excessive emotional component on the currency market. Experience shows that after a period of increased volatility, the rate always stabilizes.”
