Russia’s Ruble Hits 16-Month Low Against the U.S. Dollar
Russian Government Faces Criticism over Exchange Rate
After Russia’s ruble hit a 16-month low against the U.S. dollar, fears of rising inflation have begun to surface. Even one of President Vladimir V. Putin’s top supporters in state media criticized the country’s financial authorities, stating that the exchange rate was subject to global mockery.
The Russian central bank took steps to stabilize the currency in response to the financial volatility caused by Mr. Putin’s war against Ukraine. In addition to the struggling ruble fueling inflation, the government’s budget deficits have raised concerns about the sustainability of Russia’s spending on the war.
The Weakening Ruble
The ruble has declined by approximately 25 percent since the beginning of the year, nearing an exchange rate of 100 per U.S. dollar. In an attempt to reduce volatility, the Bank of Russia announced that it would halt purchases of foreign currency for the remainder of the year.
When the central bank buys dollars or euros with rubles, it increases the supply of rubles in circulation, which lowers their value. This move should help stabilize the ruble, although its effectiveness remains uncertain.
Challenges for Moscow’s Financial Policymakers
Russia’s changing economy poses challenges for Moscow’s financial policymakers. While they have responded quickly to wartime shocks, they still face long-term dilemmas. Yawning deficits and exports limited by sanctions have disrupted Russia’s economic balance.
The central bank has projected inflation between 5 and 6.5 percent for the year. Recent data reveals an accelerating annual inflation rate of 4.3 percent in July.
“The ruble exchange rate is only an indicator,” explains Alexandra Prokopenko, a former Russian central bank official. “It is screaming that the economy is very badly balanced… do something, because later on it will be worse.”
Uncertainty Surrounding the Ruble’s Future
While the Bank of Russia’s actions may help bolster the ruble, their impact is unclear. Analysts suggest that commodity prices and fiscal spending will be more influential in determining the ruble’s future.
Since Mr. Putin’s invasion of Ukraine in 2014, Russia has experienced economic instability. Western sanctions and capital exodus pushed the country into crisis. However, a spike in oil prices and reduced imports led to a trade surplus in 2022, causing the ruble to strengthen. This year, however, the trade surplus has shrunk, imports have increased, and oil revenues have been impacted by an embargo and falling prices.
The central bank’s decision to abandon regular buying and selling of foreign currency marks the second time during this conflict that Russia has taken such action. Vladimir Solovyov, a talk-show host on state television and a Kremlin champion, chastised the central bank for the weakening ruble and demanded an explanation.
Inflation Risks and GDP Figures
The increase in consumer prices is the immediate concern for Russian financial policymakers. The central bank raised interest rates to 8.5 percent last month to counter this risk, but further increases may be necessary. Mr. Solovyov warned that inflation rates could peak during Mr. Putin’s re-election campaign next year.
Russia will release its latest gross domestic product figures soon. While officials have touted the country’s growth outlook, analysts argue that much of the economic output is driven by state spending on the war. To reduce inflation and potential economic slowdown, decreased spending will be necessary.
In the short term, the cheaper ruble will assist the government in financing its war efforts. However, analysts differ in their opinions as to whether Russia is deliberately allowing the ruble to weaken. Some believe that the government is concerned about budget receipts, while others argue that they do not have many areas to cut spending without impacting the military or social stability.
