After the Russian ruble hit a 16-month low against the US dollar, concerns about rising inflation have arisen. Even one of President Vladimir V. Putin’s top supporters in state media has criticized the country’s financial authorities for a weak exchange rate that is being mocked globally. The Russian central bank took action on Thursday to stabilize the currency, which has been plagued by financial volatility due to Putin’s war against Ukraine. The struggling ruble has fueled inflation, and government budget deficits are causing concerns about the sustainability of Russia’s spending on the war.
The ruble has weakened by 25% since the beginning of the year and is approaching an exchange rate of 100 per US dollar. In an effort to reduce volatility, the Bank of Russia has suspended foreign currency purchases for the remainder of the year. This move should help strengthen the ruble since buying foreign currency with rubles increases the supply of rubles, leading to a decrease in their value. However, the events highlight the challenges faced by Russia’s financial policymakers, as the country’s changing economy disrupts its economic equilibrium. Yawning deficits and sanctions that restrict exports have further complicated the situation.
The central bank has predicted inflation between 5 and 6.5% this year, and recent data shows that the annual inflation rate accelerated to 4.3% in July. The weakening ruble is a clear sign of an imbalanced and malfunctioning economy. Experts warn that immediate action is necessary to avoid further deterioration.
While the Bank of Russia’s move may provide temporary relief for the ruble, its long-term impact remains uncertain. The focus now shifts to commodity prices and how government spending evolves in the coming months. Russia’s economy has been on a roller coaster ride since Putin’s invasion of Ukraine last year. Western sanctions and capital outflows pushed the country into crisis initially. However, a spike in oil prices and reduced imports resulted in a record trade surplus in 2022. Unfortunately, this year, the trade surplus has significantly shrunk, and imports have recovered as consumers return to buying and the government increases military spending.
The current situation has reduced oil revenues due to embargoes and falling crude prices. A sense of political uncertainty has also prompted Russians to move money into foreign accounts, leading to a battered ruble that has lost nearly half its value since last year. This is the second time since the war began that Russia has abandoned its policy of regularly buying and selling foreign currency to protect its energy-dependent economy from oil price fluctuations.
The weakening ruble has caused concern among media and lawmakers in Russia. Vladimir Solovyov, a talk-show host on state television and a Kremlin supporter, called out the central bank for the weak currency and demanded an explanation. The most immediate concern for financial policymakers is the risk of higher consumer prices, which prompted a higher-than-expected rise in interest rates last month. Further increases may be on the horizon. Solovyov even warned of peak inflation during Putin’s re-election campaign.
Russia’s economic growth outlook might not be as promising as officials suggest. Much of the economic output is driven by state spending on the war effort, which in turn drives inflation. Reducing such spending could lead to an economic slowdown. Although the cheaper ruble can assist the government in financing its extensive war expenditures, it caused the second-highest deficit since the Soviet Union’s dissolution last year. Some analysts believe that Russia is intentionally allowing the ruble to weaken to address budget receipts, while others think the government has no control over the situation.
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