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Russian ruble tanks amid Vladimir Putin's war economy

Uwe Hessler
August 15, 2023

After five days of consecutive losses, the Russian ruble has crashed below a psychologically important mark of 100 rubles for $1 US. What's causing the slide?

A woman walks past a currency exchange office in Moscow
The ruble has been on a slide for months amid monetary easing by the Russian central bankImage: YURI KADOBNOV/AFP/Getty Images

The Russian currency has broken another threshold in its decline in value. Over the weekend, 1 ruble was worth only 1 US cent. This means 100 rubles had to be paid for $1 US. The ruble also continued to lose value against the euro, with €1 at times costing nearly 110 rubles.

The ruble fell to its lowest point since March 2022 when the currency crashed following Russia's invasion of Ukraine. In the following few months, the currency regained the lost ground as Russia benefited from significantly higher energy prices. However, over the past year, the ruble has steadily declined.

By comparison, prior to the Russian occupation of Crimea in 2014, 30 rubles was equivalent to $1. In the past year alone, the ruble has lost more than 30% of its value against the dollar and the euro.

On Tuesday, Russia's central bank hiked its key interest rate by 350 basis points to 12% to arrest the ruble's slide. The extraordinary rate move follows a greater-than-expected hike to 8.5% in July to prop up the currency.

The ruble was trading at 98.03 against the dollar following the decision, above lows near 102 on Monday.

A person holds cash withdrawn from an ATM machine at a Sberbank branch.
Russians are getting less for their money as both inflation and the decline of the ruble accelerateImage: Anton Novoderezhkin/TASS/dpa/picture alliance

Central bank in the line of fire

Bank of Russia Governor Elvira Nabiullina has blamed declining foreign trade for the currency's weakness, and attributed higher inflation to heavier government expenditure and labor shortages caused by the costly war effort.

In a statement on Monday, the Russian central bank said the value of exports is facing a "significant reduction" at a time when demand for imports is on the rise against the background of elevated government spending and also as a result of fast lending growth.

However, Bank of Russia Deputy Governor Alexei Zabotkin told reporters on Friday that they don't see any risks to financial stability.

"The central bank continues to adhere to a floating exchange-rate policy that allows the economy to adapt effectively to changing external conditions," he said.

Maxim Oreshkin, an economic adviser to the government, blamed the central bank for contributing to declines in the ruble. In a column for state news agency Itar-Tass on Monday, he said "the source of the weakening of the ruble and the acceleration of inflation is [the central bank's] soft monetary policy."

Earlier this year, Nabiullina had mentioned a range of 80 to 90 rubles per dollar as a "comfort zone." The ruble broke out of this zone in early summer.

A picture of Bank of Russia Governor Elvira Nabiullina
Bank of Russia Governor Elvira Nabiullina increasingly finds herself between a rock and a hard place regarding monetary policyImage: Russian Central Bank/SNA/IMAGO

Putin had already demanded that all countries importing gas from Russia pay in rubles instead of dollars, as stipulated in contracts. Western countries have not complied with this demand. On the contrary, they have largely become independent from Russian oil, gas and coal. 

Why is the ruble sliding?

The ruble's downturn in recent weeks is due to higher imports and heightened foreign capital outflows, according to analysts.

But Albrecht Rothacher, an author who worked for 30 years in the European Commission, said the crucial factor is that Russia was only able to sell its oil for prices below those on world markets. Revenues of Russian oil and gas exporters declined to $6.9 billion (€6.3 billion) in July from $16.8 billion in the same period last year, according to the latest central bank data.

Another factor is that several foreign companies have pulled out of Russia since Moscow invaded Ukraine last year. Bloomberg Economics has estimated that foreign companies leaving Russia last year sold assets worth between $15 billion and $20 billion.

"The reasons behind the currency fall are the shrinking oil and gas exports and likely further withdrawal of capital by Russian resident companies, as well as foreign investors," Elina Ribakova, from the Peterson Institute for International Economics think tank, told DW. 

Then there are the growing import costs of Western high tech via third countries like Turkey, Kazakhstan, China and Serbia, added Rothacher.

What about Western sanctions?

"The sanctions are having a stronger effect, particularly the EU embargo on purchases of Russian oil and oil products," said Ribakova.

But others have said the ruble weakness is not the immediate effect of Western sanctions. Rather, they believe it's a sign of the longer-term damage the costly war is doing to the Russian economy, which includes its growing dependency on China.

"China uses Russia as a new raw material colony upon which it can force discount prices onto a captive supplier, which wastes [Russia's] dwindling assets unproductively on an unwinnable war of attrition," Rothacher told DW.

Will China rescue Russia's economy?

What happens next?

The ruble could sink further to 115-120 per dollar, Alor Broker analyst Alexei Antonov warned in a note published by financial firms on Monday. "For the declines in the ruble to end," he said, "we need to wait for a reduction in imports or decisive steps by the monetary authorities."

Alexander Isakov, a Russian economist, believes domestic monetary policy will be crucial for the ruble.

"To stabilize the ruble, we estimate the policy interest rate needs to rise closer to 10% and federal budget spending must be kept within the fiscal ceiling," he told Bloomberg News. The central bank, at its upcoming meeting in September, would need to hike interest rates by between 50-100 basis points to "boost domestic savings and reduce imports."

But other economists believe that the Russian government favors a gradual weakening of the ruble.

Analyst Tim Ash thinks the ruble is being managed weaker by the Russian authorities in response to the oil price cap and its impact in reducing both export and fiscal receipts. "Weakening the ruble helps buoy the ruble value of oil receipts in the budget, so moderating the growth in the deficit," he told DW.

Additional reporting by Jo Harper

Editor's note: The article, originally published on August 14, has been updated to reflect the Russian central bank's decision to raise the key interest rate following an extraordinary meeting.

Edited by: Ashutosh Pandey