Vladimir Putin faces a dilemma: how to continue financing his invasion of Ukraine when the value of its currency is falling like never before because of that same war. The weakening of the ruble has forced the Central Bank of Russia to undertake a sharp rise in interest rates from 8.5% to 12% just one day after signaling that everything was under control.
Alarm was raised Monday when the Russian currency fell to more than 100 rubles to the US dollar. The Bank of Russia called an extraordinary meeting after receiving a rebuke from the Kremlin. After being increased by 350 basis points, the interest rate remains at its highest level since May of last year.
Unlike a year ago, when Putin managed to weather the economic collapse, the country now bears the suffocation of Western sanctions and the weight of more than a year of war. The Russian economy was then able to ride out the wave of Western sanctions thanks to high oil and gas revenues, strong government stimulus and Russia’s quick ability to divert trade from Europe to Asia.
Now the Russian currency is worth less than half of what it was 10 years ago and this affects not only Russians traveling abroad. The ruble debacle has pushed up the prices of import-dependent items such as household appliances, cars and fruit. According to the Russian statistical service Rosstat, from December 2022 to June 2023, the average cost of cars in Russia increased by 3%. Last year car prices went up much faster. In the period from January to December 2022, vehicle inflation then rose to 24%, “now a car can cost up to 4,000 euros more,” laments Andrei, a St. Petersburg taxi driver.
Moscow needs to stop the sharp fall of the ruble and the resurgence of inflation. “The decision is aimed at limiting risks to price stability,” the bank said in a statement.
The crossroads is more difficult than ever. The government needs to borrow to keep up with spending on the war in Ukraine, but at the same time annual inflation is now above the central bank’s 4% target and accelerating. In that ‘trap’ are now the biggest risks of the Russian economy.
Political uncertainty following the aborted Wagner mutiny in June has pushed the ruble lower in recent weeks. All this after a year in which imports have grown (especially from China and Turkey) and exports have definitely fallen due to the closure of the European markets. Moscow sells its crude at a discount to world prices and Europe has largely cut itself off from Russian gas.
A weaker ruble creates uncertainty about prices and makes imports more expensive, which are already expensive because Russia buys many banned goods – from iPhones to soft drinks – but does so through third countries, a detour that drives up costs.
In seasonally adjusted annual terms, current price growth over the past three months averaged 7.6%, according to data from the Central Bank of Russia. The growing budget deficit and severe labor shortages have contributed to increasing inflationary pressure this year.
The Central Bank’s decision comes after a rate hike in July, which was higher than expected. Although the move halted the slide, many analysts agree the move would not have a lasting impact. “As long as the war continues, it’s going to get worse for Russia,” said Timothy Ash, senior emerging markets strategist at Bluebay Asset Management. He sees it as a temporary solution “unless the core problem, the war and the sanctions are resolved.” “Today’s rate hike will only temporarily slow the bleeding,” Liam Peach, senior emerging markets economist at Capital Economics, told Reuters from London. “Trapped in sanctions, Russia cannot reap the benefits of a weaker ruble with exports falling as key markets locked down, while imports rise and defense spending soars,” said Susannah Streeter, an analyst at the Hargreaves Lansdown corridor.
The governor of the Central Bank, Elvira Nabiullina, is considered a figure with a technical profile opposed to an escalation in Ukraine. To date, she has managed to wade through the storm, but now she has in front of her the nationalists of the warmongering sector, who want all the economic power of the country to be dedicated to the invasion and destruction of Ukraine.
Russian media reported last year that it was Vladimir Putin himself who prevented Nabiullina from jumping ship after the shock of an invasion that the Kremlin denied until the last moment, fooling even the Russian elite. But on Monday the Russian president’s top economic adviser, Maxim Oreshkin, rebuked the central bank and criticized its monetary policy for weakening the ruble. Hours after Oreshkin’s words, the bank announced the emergency meeting, raising questions about the independence of the institution, which had initially blamed the fall in the ruble on Russia’s shrinking current account surplus. , which has fallen 85% year-on-year between January and July.
The next interest rate decision is set for September 15. The Central Bank pointed out that it does not rule out further increases. With consumers battling rising commodity prices, the scenario is not ideal as Russia heads to the March 2024 presidential election.
