The falling value of the Russian ruble relative to other currencies makes it more difficult for the Kremlin to regulate consumer inflation while simultaneously overheating the economy through spending on the conflict against Ukraine.
The ruble is worth less than one penny in US dollars, according to the official central bank rate for Friday, which was set at 109 to the dollar. At that rate, the ruble was recovering from earlier in the week lows of about 114 to the dollar.
Similar drops have occurred against the Chinese yuan, which has mainly taken the place of dollars and euros in international trade since sanctions imposed by Ukraine’s Western allies shut off Russia from the majority of its transactions with Western banks and businesses.
Russians who were interviewed on the street in Moscow on Friday, where making careless comments can result in jail time, accepted the decline.
Yekaterina, a Muscovite who would not provide her last name, stated that she had recently paid in advance for a trip to Egypt and added, “I’m afraid to know what the rest of payment will be.” However, she went on to say: Perhaps it simply affects us personally, as travelers. But it’s not so horrible for the Russian economy. Domestic business and internal tourism are growing.
Even less worried was Semyon, who again had no last name. The currency I use for my wage, taxes, car purchase, and grocery shopping is rubles. Could you please tell me what I need the dollar for?
The Kremlin is juggling a complex situation. Due to government spending on the war, factories are operating at full capacity and the economy is expanding more rapidly than many had anticipated given the sanctions. In order to curb borrowing and spending, the central bank raised its benchmark interest rate to a painful 21% as a result of the ensuing inflation. Economists have predicted that restricted credit will eventually impede the economy, and company executives who have been stung by high borrowing prices have complained about this.
According to Russian President Vladimir Putin, the current drop is related to a number of seasonal factors, including oil prices, budgetary payments, and inflation processes.
As a result, I believe that the situation is generally under control and that there is no reason to panic.
According to Janis Kluge, a Russian economic specialist at the German Institute for Security and International Affairs in Berlin, the Kremlin is still quite concerned about the ruble and inflation.
“You can feel the impact of both the exchange rate and the inflation rate in your pocket,” he said. Furthermore, no amount of misinformation can persuade you that prices are not rising when they are. This explains why the Kremlin is extremely sensitive and places a high priority on combating inflation.
According to Kluge, a declining ruble will eventually result in higher import prices for Russians, particularly for electronics, household appliances, and cars manufactured in China, Russia’s top trading partner at the moment.
The ruble’s recent drop from August highs of 85 to the dollar can be attributed to a number of factors. Due to the decline in the price of oil, Russia’s most valuable export, foreign investors are no longer able to buy ruble assets, and Russia’s inflation rate causes its currency to depreciate in comparison to its trading partners’.
The U.S. Treasury Department’s sanctions against Russia’s Gazprombank, which were announced on November 21, may have been a significant role recently. The sanctions intensified pressure on the ruble and barred one source of foreign earnings because the bank served as a conduit for customers for what remained of Russia’s oil and natural gas trade in Europe. When and whether Russia can find a way around it is a major question.
Since it boosts oil and gas export revenues in ruble terms, the weaker ruble isn’t entirely terrible for the Kremlin. According to Chris Weafer, CEO of Macro-Advisory Ltd., the central bank is currently doing its utmost to control the rate following the shock of Gazprombank sanctions. The central bank sets the rate based on its assessment of trade requirements because sanctions prevent the ruble from being traded on the Moscow or any other exchange.
Weafer used the acronym for foreign exchange to say, “The central bank now controls the market completely and sets the rates every evening based on what they see, the inflow of money coming from Russian exporters and the demand for FX from companies who want to buy goods.”
However, when Gazprombank was added to the list of sanctions, there was a shock factor, he noted. They have determined that letting the ruble depreciate is the wisest course of action in the near future. And the reason for this is that it greatly benefits the finance ministry.
According to Weafer, the central bank will need to balance budgetary and inflationary concerns in order to choose the rate that is most appropriate for the situation. Requiring exporters to convert a larger portion of their foreign exchange profits to rubles is one approach to achieve this. They will need to consider all of those variables and choose what they think is the best exchange rate.
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