Russia's ruble has plunged to its weakest level against the U.S. dollar since the early days of its full-scale invasion of Ukraine, reflecting deepening economic troubles amid escalating geopolitical tensions and the strain of international sanctions. The ruble touched 110 per dollar on Wednesday, its lowest since March 2022, a dramatic drop from the 75-80 range it held before the war began.
The ruble's collapse coincides with the U.S. Treasury Department's recent sanctions targeting Gazprombank, Russia's third-largest bank. This move marks a significant escalation, as previous sanctions had largely spared the bank to facilitate European payments for Russian gas. With Europe now significantly less reliant on Russian energy, these new sanctions could further dent Moscow's revenues and foreign currency reserves.
Economists warn that the ruble's continued depreciation could fuel inflation, already projected to reach 8.5% this year-twice the target set by Russia's Central Bank. Ordinary Russians are feeling the strain, with the "borscht index," a cost-of-living tracker, showing a 20% rise in food prices compared to last year.
In response, the Central Bank raised interest rates to 21% in October, the highest level in over two decades, and is expected to hike rates further in December. Despite these measures, economists are skeptical about their effectiveness. Grzegorz Dróżdż, a market analyst at Invest.Conotoxia.com, noted, "The currency's bad condition weakens the country's purchasing power," adding that high interest rates have yet to attract significant investor interest in ruble-based assets.
Russia's Finance Minister Anton Siluanov defended the ruble's decline, framing it as a boon for exporters. "Today, the exchange rate is very, very favorable for exporters," Siluanov stated during a financial conference in Moscow. His comments reflect a government strategy of prioritizing export revenues, which are critical for funding military expenditures and public services.
The economic strain comes as Russia's military spending surges to unprecedented levels. Nearly one-third of the 2024 budget has been allocated to defense-the highest proportion since the Cold War-placing additional pressure on an economy already grappling with labor shortages as working-age men are conscripted or flee the country.
Sanctions have also taken a toll on Russia's energy sector, once the backbone of its economy. Gazprom, previously the largest company in Russia by market capitalization, has suffered record losses as foreign sales have dried up. While Moscow has redirected much of its oil exports to markets in China and India, the process has come at a steep discount, further eroding revenues.
Analysts highlight signs of stagnation in the broader economy. Alexander Kolyandr and Alexandra Prokopenko, economists from the Institute of Economic Forecasting at Russia's Academy of Sciences, recently wrote, "Slowing economic activity and deterioration of financial indicators are becoming increasingly evident in a number of sectors." They added that while military-linked industries are experiencing growth, other sectors are stagnating or shrinking.
The sanctions are also complicating international trade. Purchasers of Russian oil and gas must navigate a maze of payment restrictions, further delaying transactions and reducing trade volumes. These hurdles are expected to exacerbate the ruble's decline during the upcoming holiday season when imports traditionally rise to meet consumer demand.
Despite the challenges, Russia's economy has proven more resilient than many Western analysts initially predicted. However, this resilience has come at a cost, with growing concerns about long-term viability. As economist Dróżdż noted, "The sanctions packages imposed are having their negative effects, felt by Russians mainly in the form of high inflation."
