The Russian ruble is in decline. It lost 8.5% in just one day on 27 November, and touched 114.5 rubles to the dollar, a level not seen since March 2022, before bouncing back a bit. Overall, it has fallen 11% in a week.
The immediate trigger was a wave of recent US sanctions, but there are also structural reasons behind the decline.
On November 21, the US sanctioned some 50 Russian banks with connections to the global financial system, including Gazprombank, which serviced international payments for key gas exports. This created a rush for dollars, although this problem has been on the cards for some time.
Firstly, the dollar has been strengthening against major currencies, and oil prices have been sliding after Donald Trump’s victory at the US Presidential elections, which the markets see as a promise of better US growth and increased oil production.
Secondly, government spending increased in the fourth quarter, a normal occurrence, although this year’s numbers were higher than in previous years. This created an overhang of rubles, or in other words, a higher supply of rubles on the exchange markets.
Then, in October, the government allowed exporters to repatriate a quarter of their foreign exchange revenue. This created an anticipated reduction in dollar supply.
Moreover, there was a constant rise in the cost of transborder operations, due to the stiffening of sanctions against intermediaries, both trading and financial. It resulted in a rise in import prices and a decline in export revenue, thus tilting the exchange balance towards a weaker ruble.
And finally came the sanctions, and with them, a rising demand for dollars in anticipation of even more shortages.
A rise in demand and a decline in supply resulted in a drop in the exchange rate.
Why does it matter? The rate drop will cause a rise in inflation, the scourge of the Central Bank. Previously, any drop in the rate caused foreigners to invest in cheaper rubles in anticipation of a higher rate, while also boosting domestic production, as consumers switched to homemade goods and services from more expensive imports.
The former wouldn’t be possible now, as the Russian market is out of bounds for international capital. It is also problematic, as the overheated economy has no capacity to increase production. The result would be a higher than pre-2022 rise in inflation relative to the decline of the ruble exchange rate. A 10% drop in the exchange rate can now be expected to cause about a 0.5 percentage point rise in inflation, compared to around 0.2 in happier days.
There is little the Bank of Russia can do, apart from reducing its purchase of foreign currency from the market, as dictated by the fiscal policy of moving additional oil revenue to the rainy day National Wellbeing Fund.
It can’t hike interest rates very far from an already painful 21%, which is causing the non-military elements of the economy to slow to stagnation and flirt with bankruptcy.
It can’t directly intervene in the forex market, as it has a limited amount of dollars to defend the ruble. At the same time, it doesn’t have the luxury of relying on China’s supply of renminbi — China has shown zero appetite for providing liquidity and swap lines to its ally.
The most reliable arrow in the government’s quiver is for President Putin to kindly ask exporters to sell some of their foreign exchange revenue for rubles.
This might help stop the decline, but it would transfer problems to the exporters. As they are moving sales to rubles from dollars/euros to avoid the risk of the sanctions, they have less to sell, and anyway, need the currency for their own operations.
Alexander Kolyandr is a Non-resident Senior Fellow at the Center for European Policy Analysis (CEPA) specializing in the Russian economy and politics. Previously, he was a journalist for the Wall Street Journal and a banker for Credit Suisse. He was born in Kharkiv, Ukraine, and lives in London.
Europe’s Edge is CEPA’s online journal covering critical topics on the foreign policy docket across Europe and North America. All opinions expressed on Europe’s Edge are those of the author alone and may not represent those of the institutions they represent or the Center for European Policy Analysis. CEPA maintains a strict intellectual independence policy across all its projects and publications.
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