Russian authorities are trying to contain panic sparked by the ruble’s sharp fall this week, with the central bank forced to intervene on Wednesday to support the currency.
The ruble fell to 114 to the dollar on Wednesday, its lowest level since March 2022, when Russia invaded Ukraine.
The Central Bank of Russia (CBR) was forced to intervene on the same day to support the ruble, saying it would suspend foreign purchases in the domestic currency market for the rest of the year “to reduce volatility in financial markets.”
After the intervention, the ruble was trading at 110 to the dollar on Thursday morning.
Russian President Vladimir Putin previously commented that there was no need to panic about the ruble’s depreciation, and that ruble fluctuations were affected by budget payments and seasonal changes.
“I think the situation is under control and there is absolutely no need to panic,” Putin told reporters, according to Russian news agencies.
“As for the fluctuations in the ruble exchange rate, this is related not only to the inflation process, but also to budget payments, to oil prices. There are many seasonal factors,” he added in comments translated by Google.
According to a report by Russian media Google Translate, Kremlin spokesman Dmitry Peskov also shrugged off the ruble’s fall, telling reporters on Wednesday that it would not affect ordinary Russians because their salaries are paid in rubles.
People who closely follow Russian geopolitics and macroeconomics say the ruble’s fall means Moscow’s economic situation is deteriorating fast.
Timothy Ash, emerging market strategist at BlueBay Asset Management, described the ruble as “in free fall” and said Russia seemed to be “brewing a real currency crisis.”
“A fall in the ruble means higher inflation, higher central bank policy rates, and lower real GDP growth,” Ash said in emailed comments.
The ruble’s plunge is partly due to a series of new sanctions against Gazprombank announced by the United States last week, as well as soaring inflation in the domestic economy caused by the war.
The central bank has raised interest rates to 21%, but has so far failed to curb sharp price increases, with inflation reaching 8.5% in October, while the prices of basic foods such as butter and potatoes have risen sharply over the past year.
The government blames the high cost of living on sanctions imposed by “unfriendly” countries to distract from Russia’s war with Ukraine, a conflict that has simultaneously created labor and supply shortages, pushing up wages and production costs.
President Vladimir Putin denies “trading butter for guns,” despite rising price pressures amid a sharp increase in defense spending and strengthening domestic weapons production.
The Russian economy has continued to grow during the war, largely thanks to its oil and gas exports to a handful of countries willing to turn a blind eye to the conflict. The International Monetary Fund raised its GDP forecast for Russia in its fall economic outlook, now predicting 3.6% growth in 2024.
But the agency also noted a deceleration, forecasting 1.3% growth in 2025, noting that this reflects “a sharp slowdown in economic growth…as private consumption and investment slow due to less tight labor markets and slower wage growth.”
“A crisis is brewing”
The ruble’s devaluation comes as the Biden administration makes a last-ditch effort to pressure the Kremlin ahead of President-elect Donald Trump’s inauguration next January.
The latest round of sanctions, targeting Gazprombank, Russia’s third-largest bank, is particularly painful for Russia because the sanctions prohibit the financial institution from processing any energy-related transactions involving the U.S. financial system. The Treasury also accused the bank of acting as a conduit for Russia to purchase military supplies for its war on Ukraine and to pay Russian soldiers’ salaries.
The White House had previously been cautious about sanctioning the bank because it is also used to receive payments from European buyers of Russian gas — but most European consumers have expected to significantly reduce their purchases of Russian gas since the war began.
“For several months, we have seen sanctions getting tougher and tougher — sanctions on the Moscow Stock Exchange MOEX, secondary sanctions from OFAC, and now sanctions on Gazprombank,” noted Ash of BlueBay Asset Management. “As a result, it has become more difficult for Russia to conduct foreign trade.”
There is no doubt that the war and the measures taken by the West to punish Russia for its aggression are starting to have real effects, economists say.
As the ruble fell further, Joseph Brusuelas, chief economist at RSM US, said Wednesday: “One might conclude that two years of sanctions are beginning to wreak havoc on the Russian economy.”
In comments on X, he said the Russian economy appeared to be “an overheated economy that is struggling to support its war effort and exhausting its resources,” noting that the Russian central bank appeared to have “exhausted extraordinary measures to avoid the apparent end result, which is to stop buying foreign currency starting today.”
“The central bank has stopped buying foreign exchange until the end of the year to curb volatility in financial markets. The ruble has fallen 35% since August as inflation wreaks havoc on the domestic economy, [and] the Kremlin has made a decisive choice between using cannons or butter,” he said, urging observers to “keep an eye on this space for signs of broader economic problems, as inflation is soaring and black market prices tell a completely different story, that of a wartime economy on the brink of collapse.”
Russ officials were quick to downplay the ruble’s sharp devaluation and again blamed the sanctions for the fall.
Russian Economic Development Minister Maxim Reshetnikov told reporters on Wednesday that the dynamics of the ruble exchange rate are not determined by “fundamental factors.”
“The current weakening of the exchange rate has nothing to do with fundamentals, we see a strong trade balance,” he said, according to a Google Translated comment, according to Russian news agency Interfax.
“The main factors contributing to the weakening of the exchange rate are the appreciation of the dollar against world currencies and … the renewed tightening of sanctions against the Russian Federation,” he told reporters in Astana. “In addition, as often happens in such cases, there are currently too many emotional factors on the currency market. Experience shows that after a period of increased volatility, the exchange rate always stabilizes,” he told reporters in Astana.
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