The Russian rouble dropped to 110 against the US dollar on November 27, its lowest level since the start of the war in Ukraine. It has since rallied slightly, but the rouble is still down by 8% against the dollar over the past month. This is not a one-off event; it is part of a developing crisis that is affecting Russia’s economy.
Author
- Nasir Aminu
Senior Lecturer in Economics and Finance, Cardiff Metropolitan University
Russia’s currency has been highly volatile since its troops invaded Ukraine in February 2022. The initial collapse, which saw the rouble lose one-third of its value by March compared with the start of the year, was due to the exodus of capital from the country following the introduction of western sanctions. Capital flowing out of Russia made the rouble more readily available on the foreign exchange market, hence causing its value to depreciate.
In response, Russia’s central bank implemented strict capital-control measures to stabilise its currency. The measures included mandating that exporters convert 80% of their foreign currency earnings into roubles, as well as limiting foreign currency withdrawals for individuals to US$10,000 (£7,900).
By the middle of 2022, when energy prices were rising, Russia had found ways to circumvent the sanctions and export much of its oil and gas to countries like China and India . Russia benefited from strong export revenues and the rouble temporarily recovered its value. The capital controls also artificially boosted demand for the rouble, making it one of the best-performing currencies of the year.
However, falling energy prices and tighter sanctions in 2023 caused a drop in Russia’s export revenue. The G7 countries, the EU and Australia imposed a cap on the price of Russian oil, which led to decreased foreign currency inflows and thus a reduction in the value of the rouble.
The November 2024 slump is, at least in part, still the result of these factors. Key issues include the continued decline in export revenues due to sanctions and the G7 oil price cap , as well as the impending end of pipeline gas supplies to Europe via Ukraine in 2025.
But new US sanctions , which came into effect on November 21, have worsened the situation. Gazprombank, one of the few major Russian lenders that had yet to be targeted, as well as 50 small- to medium-sized Russian banks, 40 local Russian registrars and some Russian central bank officials have all now been cut off from doing business with the US and its allies.
This limits transaction gateways, so buyers of Russian oil and gas will again have to find new ways to do business, as they did in 2022. The market expects these sanctions to reduce the flow of foreign currency towards Russia, consequently making the rouble depreciate.
The Bank of Russia has intervened by suspending all foreign currency purchases in the domestic market until the end of the year. This will stabilise the exchange rate, albeit artificially. However, trading will continue on the black market.
More instability awaits
A volatile and weaker rouble will discourage domestic and foreign investment, as investors prefer to transact with a strong and predictable currency. It will also encourage people to move their capital out of the country, as it has since the war began, so the central bank will be forced to use its reserves to defend the rouble. But Russia is already constrained by limited foreign currency inflows and high spending demands – a vicious cycle that will further weaken its currency.
A weak rouble also raises the cost of importing goods or materials. The profit margins of import-dependent businesses will be reduced unless they pass the increased costs onto consumers – something that is relatively easy to do in Russia where there is minimal market competition.
This drives inflation for imported items like food, medical supplies, machinery and energy. Russia imported over US$81 million worth of electricity in 2022, primarily from Lithuania, Kazakhstan, Latvia, Azerbaijan and Mongolia. And it imports certain refined petroleum products, too. The annual rate of inflation in Russia was estimated at 8.4% in October – twice the central bank’s target – and is not expected to fall before the end of the year.
Russia’s president, Vladimir Putin, and his economy minister, Maxim Reshetnikov, claim there is no need for emergency steps to support the rouble. Reshetnikov has said the rouble’s volatility is due to the global strength of the US dollar and predicted that market concerns following the latest sanctions would soon stabilise.
But failure to act decisively risks further depreciation, which will only reduce confidence in the rouble even more. Analysts expect the central bank’s current interest rate of 21% to rise to stabilise the rouble and curb inflation. However, raising the rates will probably slow the economy.
There is plenty for Putin to be concerned about. Falling export revenues, inflation and strained reserves all weaken Russia’s fiscal stability. And it looks as if western economic sanctions are now having a significant effect on Russia’s ability to counter its economic difficulties.
The administrators of Putin’s regime will argue that a weaker rouble is more favourable to them during the war. Converting stronger foreign currencies from energy exports will give the Kremlin more domestic currency to plug the government’s widening deficit.
Despite this, Russia’s currency crisis has exposed deep problems in the economy. It relies heavily on energy exports, has limited economic diversification and has a weak financial sector. Over the longer term, sanctions will also isolate Russia further and limit its economic autonomy because Putin will have no choice but to rely on doing business with a few trading partners, such as China and India.
