The Complex Dynamics Behind the Ruble’s Decline: An In-Depth Analysis

The Russian ruble, a currency that once stood resilient against global pressures, is now witnessing a steady depreciation. As of October 18, Russia’s central bank pegged the official exchange rate at 97.1 rubles per US dollar, marking a significant decline from early August when it hovered just above 86 rubles per dollar. This depreciation has left analysts grappling for explanations, with various theories emerging to explain this downward trajectory. Despite the lack of a clear consensus, the value of the dollar continues to rise against the ruble, raising concerns about the broader economic implications for Russia.

One of the primary responses from the Russian central bank to counteract this depreciation was to raise the interest rate to 19%. Traditionally, such a move is aimed at strengthening the national currency by making it more attractive to investors. However, the expected stabilization did not materialize as anticipated. Although oil prices saw an uptick during this period, which should have theoretically bolstered the ruble, the currency’s decline only temporarily halted, gaining a mere three rubles by the end of September. This temporary stabilization was attributed to sanctions prompting Russian exporters to conduct more transactions in rubles, thereby increasing demand for the local currency.

The sanctions imposed on Russia have had far-reaching effects, influencing not just trade but also the operational dynamics of Russian exporters. These exporters, now trading more in rubles, inadvertently created a surge in demand for foreign currency as foreign buyers sought rubles from local banks. However, this demand was short-lived and failed to provide a long-term solution to the ruble’s decline. The finance ministry’s adjustment of its operations under the fiscal rule, coupled with expectations of a calmer October, did little to alleviate the situation, even as oil prices remained high and foreign currency sales increased.

Despite predictions of another interest rate hike by the central bank in October, this did not occur, leading to further depreciation of the ruble. Within a span of two weeks, the dollar rose from 93 to 97 rubles, reaching its highest point in a year. Analysts suggest this surge could be linked to adjustments in Russian foreign trade and capital outflows, particularly as non-residents divest assets ahead of impending sanctions. This scenario has sparked debates among economists regarding the possibility of the dollar reaching 100 rubles by January, with forecasts ranging from continued decline to potential strengthening of the ruble.

Russia’s central bank initially imposed capital controls following the full-scale invasion of Ukraine, aiming to mitigate the impact of Western sanctions and fluctuating energy prices. These measures, combined with a decrease in imports, allowed the ruble to emerge as one of the world’s best-performing currencies in 2022. However, the landscape shifted dramatically in 2023 as Europe ceased importing Russian oil and gas, and the G7 implemented a price cap on Russian petroleum products. In response, the central bank raised interest rates multiple times and mandated key companies to sell portions of their foreign currency earnings.

Oleg Vyugin, a former top bank official, remarked that the current exchange rate of 100 rubles per dollar is not inherently alarming but acknowledged its inflationary consequences. The ruble’s depreciation against the dollar and the Chinese yuan—9% and 11% respectively—has been exacerbated by U.S. sanctions against the Moscow Exchange, compelling a halt in dollar and euro trading. The economic development ministry projects the ruble to average 96.5 per dollar by 2025, while the central bank contemplates raising interest rates to 20% to curb an overheating war economy and inflation.

Amidst these economic challenges, Russia’s independent journalism faces its own set of hurdles. The Moscow Times, designated as an “undesirable” organization by the prosecutor general’s office, highlights the precarious state of press freedom in the country. This designation poses significant risks to its staff, as authorities accuse them of undermining Russian leadership decisions. Despite these pressures, The Moscow Times remains committed to providing unbiased reporting and seeks support from readers to continue its mission.

The broader economic picture in Russia is further complicated by discrepancies in reported economic data. While Russian officials claim a GDP growth rate of 4.6% in the first half of 2024, other indicators such as inflation and currency devaluation tell a different story. Economist Steve Hanke estimates real inflation at 27%, starkly contrasting the central bank’s figure of 9.1%. Such disparities raise questions about the sustainability of Russia’s economic strategies, especially in light of plans to increase military spending by 24% in 2025.

Russia’s economic woes are compounded by the war in Ukraine, which has significantly strained the country’s financial resources. The national budget, predicated on an oil price of $72 per barrel, faces deficits due to market fluctuations and geopolitical tensions. Saudi Arabia’s disregard for OPEC+ target prices could drive oil prices down to $50 per barrel, further exacerbating Russia’s fiscal challenges. To address these deficits, economists predict a potential devaluation of the ruble to between 122 and 135 to the dollar, a move that would severely impact the average Russian citizen, given their high expenditure on food.

The Kremlin’s approach to the ruble’s depreciation appears to diverge from past crises. Unlike previous instances where panic ensued, current officials seem less concerned about the ruble nearing 100 per dollar. This depreciation might even benefit the state budget, aligning with increased government spending plans. However, the decline has been worsened by changes in the central bank’s valuation calculations and a growing foreign currency shortage, exacerbated by U.S. deadlines for exiting the Moscow exchange.

The ruble’s weakening against the yuan, dropping by 11%, underscores the shifting dynamics in Russia’s foreign currency preferences. Since the 2014 invasion of Ukraine, the yuan has gained prominence as the Kremlin’s favored currency amidst Western sanctions. The ruble’s fall against the yuan, now at its lowest since May, reflects broader geopolitical and economic shifts. Previous measures like raising interest rates and imposing capital controls have been revisited, albeit with reduced mandatory conversion of export revenues due to secondary sanction threats from the U.S.

The ongoing war economy and high inflation continue to pose significant challenges for Russia, potentially necessitating another interest rate hike. Exporters face difficulties in securing payments from foreign banks, while borrowing costs soar, exceeding 20% for both domestic and foreign currencies. President Vladimir Putin acknowledges the complexities of cross-border payments and explores solutions within the BRICS framework, including the potential adoption of blockchain technology. As Russia navigates these turbulent waters, the interplay between economic policies, geopolitical tensions, and internal challenges will shape the future trajectory of the ruble and the broader Russian economy.