Introduction: Russia’s Ruble Plunges Amid Fresh Sanctions and Wartime Economy Strains
Russia’s ruble plunges to its lowest level against the U.S. dollar since the beginning of its full-scale invasion of Ukraine, a result of new U.S. sanctions and the latest signs of a beleaguered wartime economy.
Impact of New Sanctions
On Wednesday, Russia’s central bank announced it would cease foreign currency purchases for the rest of the year after the ruble weakened beyond 110 rubles to the U.S. dollar, marking a one-third drop since early August. “The decision was made to reduce the volatility of financial markets,” the regulator stated.
This decline follows recent U.S. sanctions on Gazprombank, Russia’s third-largest bank, and its six foreign subsidiaries, which manage most foreign payments for natural gas exports. Previous sanctions had spared Russian gas due to Europe’s heavy reliance, but European countries have since diversified their energy sources.
Economic Strain
The U.S. treasury and state departments stated that the new sanctions aim to hinder the Kremlin’s ability to evade existing sanctions and fund its military operations. Canada and the United Kingdom had previously sanctioned Gazprombank.
Dmitry Pyanov, deputy CEO of Russia’s second-largest lender VTB, noted that U.S. sanctions on Gazprombank likely impacted the ruble significantly, as it ceased being a channel for delivering foreign currency to the Moscow Exchange.
Russia’s finance minister, Anton Siluanov, mentioned that a weaker ruble is “very, very favourable” for exporters, indicating the Kremlin might be content with the current exchange rate situation.
Overheating Economy
New economic data released on Wednesday highlighted signs of an overheating economy retooled for wartime. Real wages increased by 8.4% year-on-year in September, unemployment hit a record low of 2.3% in October, and weekly inflation stands at almost 0.4%. Overall inflation remains stubbornly around 8%, double the central bank’s target.
To combat inflation, the central bank raised its base interest rate to a record 21% last month. However, massive government spending on the military and the labor force complicates efforts to rein in inflation. Political science professor Lisa Sundstrom from the University of British Columbia explained, “One of the things driving inflation is that they’re paying people so much money to go to the war, to recruit them.”
Future Outlook
The ruble’s decline could further fuel inflation, with the central bank estimating that a 10% weakening of the currency adds 0.5 percentage points to inflation. This suggests that the recent fall could add 1.5% to the current inflation rate.
Economist Evgeny Kogan highlighted the central bank’s challenges in combating rising prices, while Chris Weafer, CEO at Macro-Advisory Ltd., described the recent interest rate hike as “not so much a cry for help, but a scream of pain” from regulators.
Independent Russian economists warn that the economy is entering a period of “stagflation”—a combination of high inflation and low growth. Over one-third of next year’s budget is allocated to the military-industrial complex, as Moscow continues its war efforts in Ukraine.
Sundstrom also noted potential economic crises if the war ends and funding stops. She questioned the sustainability of high wages paid to soldiers and laborers once the conflict ceases.
Conclusion: A Struggling Wartime Economy
As new sanctions take effect and the economy strains under wartime pressures, the future remains uncertain for Russia’s financial stability. The prolonged conflict and economic measures pose significant challenges for the nation’s economic policymakers.
