Russia panics as US sanctions trigger ruble collapse – DW – November 28, 2024

The Russian ruble has fallen to its lowest level against the dollar since the all-out 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 halt foreign currency purchases to strengthen the currency and ease pressure on financial markets.

What is behind the currency collapse?

The ruble has been sliding since late summer and has fallen by more than a third since August. Over the same period, oil prices have fallen, affecting Russia’s ability to make its most important raw material.

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 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 euros) in next year’s budget, another huge 25% increase. The country’s central bank estimates inflation has reached 8.5% this year, twice its target. Interest rates are also at record highs, reaching 21% in October.

However, the sharp fall in the ruble in recent days is linked to the sanctions that the USA imposed on Gazprombank on November 21st. Gazprombank was one of the few major Russian banks previously unaffected by sanctions and had become the main platform for Russian energy payments and its main gateway to the global financial system. Gazprombank’s exclusion from the U.S.-dominated global financial system limits the Kremlin’s ability to finance its military and also makes it harder to obtain revenue for its raw materials, including gas, from its remaining European customers such as Slovakia and Hungary .

The United States has also moved to bar foreign banks from doing business with Russia, warning them that they could face secondary sanctions if they join Russia’s so-called financial intelligence reporting system (SPFS), the Kremlin alternative to the West. dominated SWIFT system.

Chris Weafer, an investment advisor who has worked in Russia for more than 25 years, believes that the sanctions against Gazprombank could have “serious consequences” for the budget “if workarounds are not found or the US does not grant waivers to some countries.” . . “The Russian Central Bank is trying to find a way to deal with this. There are indications that she is still looking for a solution,” he told DW.

Oleg Buklemishev, a Moscow-based economist, said via video Podcast DW Novosti Show that recent developments reflect the varying pressures that the Russian economy has faced since the invasion.

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

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

Since Russia began dramatically increasing its defense spending, experts have warned of the dangers of overheating its war economy. While the country has seen strong GDP growth and record low unemployment due to the explosion in spending, inflationary pressures have increased.

Russia released new data this week that highlighted some of the problems. Given the severe labor shortage due to the sending of workers to Ukraine and the fact that over a million highly skilled workers left Russia due to the war, real wages rose by 8.4% year-on-year in September.

The rise in income and spending has caused the prices of essential consumer goods such as butter to rise so much that theft is commonplace. In many stores, butter is now sold in sealed boxes.

What did the government say?

The central bank said its decision to stop buying foreign currencies 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 sanctions against Gazprombank. They were not the result of “fundamental factors,” he told the Russian news agency InterfaxThe situation will “stabilize soon,” he added.

There are indications that a weak ruble would suit Putin’s massive spending plans. A weak ruble means the Kremlin may be able to issue more local currency since its oil and gas exports are typically bought in foreign currencies.

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

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

“They want to keep the budget deficit low,” he said, adding that he thought they could also see benefits in making their exports, such as fertilizer, cheaper for potential buyers.

What is likely to happen next?

Russia’s economy has defied all 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 huge oil and gas reserves gave it huge revenues throughout 2022, while its ability to evade sanctions allowed it to keep revenues healthy for much of 2023.

Although it has taken some time to find ways to overcome the sanctions, it has always managed to do so and may be able to do so despite the recent sanctions against Gazprombank. It has also deepened trade ties with China, India and other countries as European countries have largely turned away from 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 levels that are dangerous for financial stability. This puts considerable pressure on the Kremlin to bring the situation under control as quickly as possible.

Weafer said the weak ruble would make the fight against inflation more difficult for authorities. But he warns that every time the ruble has slipped before, the government has intervened at some point to correct the course. “Maybe we’ll see it again before the end of the year,” he said.