Russia’s rouble has plunged to its lowest rate against the dollar since the early weeks of the full-scale invasion of Ukraine in the wake of new western sanctions and growing geopolitical tensions.
The rouble on Wednesday hit 110 against the dollar for the first time since 16 March 2022. Before launching its war on Ukraine in February 2022, the Russian currency traded at around 75-80 against the US dollar.
The latest drop came just days after the US introduced sanctions against Gazprombank, Russia’s third-largest bank, which played a key role in processing payments for the remaining Russian natural gas exports to Europe.
Earlier rounds of sanctions had spared Russian gas because Europe’s economy was so dependent on it, but it is now far less reliant on Russian supplies. The Gazprombank sanctions raise the prospect of a further decrease in gas revenues and foreign currency for Moscow.
The rouble’s weakening threatens to erode Russians’ purchasing power by increasing the cost of imported goods and could further increase inflation.
The country is already contending with runaway inflation, which could climb to 8.5% this year – twice the Central Bank’s target.
The borscht index, an online cost of living tracker monitoring the prices of four ingredients needed to make the traditional soup, reports a 20% rise compared with 2023.
The rising inflation prompted the Central Bank last month to raise interest rates to 21% — their highest level in more than 20 years — and a further hike is expected in December.
The weak rouble will, however, also help the Kremlin prop up its budget – much of which comes from energy exports – in order to pay for its war in Ukraine and maintain public spending.
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While Europe has significantly reduced its reliance on Russian energy, Moscow has successfully redirected much of its oil exports to markets in China and India.
In a rare official comment on the exchange rate, Russia’s finance minister, Anton Siluanov, hinted that Moscow was content letting the rouble slide, saying that Russia’s weak rouble was benefiting exporting companies, offsetting the negative impact of the Central Bank’s high benchmark interest rate.
“I am not saying whether the exchange rate is good or bad. I am just saying that today the exchange rate is very, very favourable for exporters,” Siluanov told a financial conference in Moscow.
Russia’s economy has proven more resilient to international sanctions and the pressures of war than many western officials anticipated. However, surging military expenditures and a deepening labour shortage as working-age men go to the front or flee are sparking growing concerns in Moscow about the strain on the economy and the long-term viability of sustaining a costly conflict.
Nearly a third of Russia’s 2024 budget has been allocated to military spending, the highest level since the cold war.
Analysts have said that the country’s economy was starting to show signs of stagflation – a combination of low growth and high inflation.
In a report published earlier this month, economists from the Institute of Economic Forecasting at Russia’s Academy of Sciences said that “slowing economic activity and deterioration of financial indicators are becoming increasingly evident in a number of sectors”.
The Russian economists Alexander Kolyandr and Alexandra Prokopenko contend that the country’s militarisation has stifled growth in other sectors of the economy.
“The only place growth is still noticeable is in sectors linked to the military. Everywhere else in the economy growth is absent, or, at best, anaemic,” they wrote in a recent report.