The Russian ruble has been facing significant downward pressure, prompting the Central Bank of Russia to take unprecedented action in an attempt to stabilize the currency and curb soaring inflation. Fortune magazine reports that the Central Bank has halted all foreign currency purchases for the remainder of 2024 and is actively selling Chinese yuan to bolster the ruble. This strategy aims to establish a floor for the ruble and mitigate inflationary pressures stemming from the rising cost of imported goods.
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alt: Graph depicting Russian inflation rates.
The ruble’s decline, falling below 114 rubles to the dollar in late November, has been described as a “panic” in the Russian currency market by the newspaper Rossiyskaya Gazeta. While Finance Minister Anton Siluanov argues that a weaker ruble benefits exporters by making their goods cheaper for foreign consumers, it also carries the risk of imported inflation.
Sanctions and Economic Fallout
The Russian economy is grappling with the effects of Western sanctions, which have restricted foreign investment and access to US dollar transactions. This has left Russia without a stable reserve currency supply in US dollars, exacerbating the challenges posed by inflation. Official figures place inflation at a peak of over 9% year-on-year in August, but some analysts believe the actual rate could be significantly higher.
The Central Bank’s announcement followed new US sanctions on Gazprombank, a key player in Russian natural gas exports to certain European countries. These sanctions targeted the bank’s ability to process cross-border payments, further impacting Russia’s financial stability.
Labor Shortages and Rising Prices
Russia’s mobilization of hundreds of thousands of men for the conflict in Ukraine has created labor shortages and driven up wages in the civilian economy. This, coupled with increased domestic demand and supply chain disruptions, has contributed to rising consumer prices. Basic goods like potatoes have seen prices nearly double since December 2023, while butter prices have increased by 27.5%, leading to anti-theft measures in stores. Mortgage rates have also surged after the government discontinued housing subsidies in July.
alt: Security tag attached to a package of butter in a Russian supermarket.
Central Bank Governor Elvira Nabiullina acknowledged the widespread price increases, noting that “almost everything has become more expensive: raw materials, components, logistics, equipment, and labor.”
Interest Rate Hikes and Their Limitations
In response to these pressures, the Central Bank raised its key interest rate by two percentage points to 21% in October – the highest level since 2003. However, this measure has not yet been sufficient to curb inflation or halt the ruble’s decline. Some, like the business daily RBK, advocate for further rate hikes, even to as high as 30% to 40%, to support the ruble.
Others, like Severstal chairman Alexey Mordashov, argue that high interest rates are hindering economic activity with limited positive impact. He likened the situation to “the cure being worse than the disease.”
Conclusion
The Russian economy is navigating a complex landscape of sanctions, inflation, and currency devaluation. The Central Bank’s actions reflect the urgency of the situation, but the long-term effectiveness of these measures remains uncertain. The interplay between these factors and the ongoing conflict in Ukraine will continue to shape Russia’s economic outlook in the months ahead.
