The rouble has plunged to its weakest point against the dollar in 16 months, driven by increased Russian military expenditures and a stark drop in export earnings. These factors exacerbate the strain the currency is already under from Western sanctions and significant capital flight.
This year, the Russian currency has shed approximately 25% of its value, dipping beyond 100 roubles to the dollar during early trades on Monday due to the ramifications of the conflict with Ukraine. This downturn surpasses the rouble’s prior gains when Russia’s initial foray into Ukraine was followed by a significant spike in oil and gas prices.
The currency’s decline has intensified lately, putting financial strain on Moscow. This is especially evident since Western sanctions have curtailed capital intake and European nations have gradually shifted away from relying on Russian energy, which cuts into Russia’s oil sales revenue.
While Moscow’s domestic economy has received a boost from increased defense spending and social programs, such as payments made to the families of soldiers killed in the Ukrainian conflict, these expenditures have also amplified the budgetary deficit, pushing the rouble further down.
The uptick in expenses resulted in a 20% increase in yearly imports for the first half of this year.
“Currency inflow has become scarce, leading to a sort of currency drought,” commented Vladimir Milov, a former deputy energy minister who currently critiques the Kremlin from abroad.
“Import levels have bounced back to what they were before the conflict. However, now we predominantly source consumer and manufactured goods from places like China, Turkey, Central Asia, and the Emirates instead of the West. Purchases still need to be made in some currency, but the rouble is no longer favoured.”
The significant reduction in interest rates last year led to a further decline in the rouble’s value; the Central Bank of the Russian Federation reduced its rate from 20% to 7.5% in under twelve months.
“Government expenditure directly influences the increase in imports, with minimal delay,” commented Natalia Lavrova, the leading economist at BCS Global Markets. “A relaxed monetary policy has a similar effect, but it takes longer.”
Following the invasion, in a unique instance of internal criticism, Russian media quickly pointed fingers at the CBR. Elvira Nabiullina, the head of the CBR, has been criticized by Russian hardliners, accusing her of being “overly lenient” in managing the rouble’s decline.
“With the ongoing situation in the country, how did we end up with this exchange rate? This will inevitably result in increased consumer prices, coinciding with the upcoming election campaign,” remarked Vladimir Solovyov, a renowned state TV host, alluding to the forthcoming Russian presidential election in March.
