On November 28, the Russian ruble dropped to 113 against the US dollars, which is its lowest level since the start of the conflict in Ukraine.
The ruble has since risen a little to 105 on December 4, but it has fallen back to 105 in the last quarter, or about 8 %, against the dollar. This is not a one-off function, it is part of a developing issue that is affecting Russia’s market.
Since its army invaded Ukraine in February 2022, Russia’s money has experienced extreme volatility. The ruble’s original decline, which saw it lose one-third of its value by March compared to the start of the year, was the result of the nation’s exodus of capital following the enactment of Western sanctions.
The ruble’s worth decreased as a result of money flowing out of Russia, which made it more readily accessible on the foreign exchange market.
In answer, Russia’s central banks implemented strict capital-control steps to maintain its currency. The measures included requiring manufacturers to exchange 80 % of their international currency profits for francs and imposing a US$ 10,000 maximum for individual foreign currency withdrawals.
Russia had discovered a way to evade sanctions by exporting a lot of its oil and gas to nations like China and India by the middle of 2022, when electricity prices were rising.
The Russian benefited from robust export earnings, and the ruble’s price was briefly revived. The money controls deliberately increased the demand for the rubles, making it one of the year’s best-performing assets.
But, falling energy costs and tighter sanctions in 2023 caused a decline in Russia’s trade income. The G7 nations, the EU, and Australia placed a cover on the price of Russian crude, which resulted in a drop in foreign currency flows and a decline in the value of the rubles.
The November 2024 collapse is, at least in part, also the result of these factors. The main problems are the ongoing reduction in export earnings brought on by sanctions and the G7 oil price cover, as well as the looming end of the pipeline gas supply to Europe via Ukraine in 2025.
But new US restrictions, which came into effect on November 21, have worsened the position. Gazprombank, one of the few big Russian loans that had yet to be targeted, as well as 50 tiny- to medium-sized Russian businesses, 40 regional Russian clerks and some Russian central bank officials have all now been cut off from doing business with the US and its allies.
Customers of Russian oil and gas will once more have to find new ways to conduct company, as they did in 2022 due to this restriction. The business anticipates that these sanctions will lessen the flow of foreign money to Russia, leading to a decline in the rouble.
The Bank of Russia has taken an action by halting all private dollar payments through the end of the year. This will maintain the exchange level, albeit intentionally. However, trading may remain on the black business.
More instability away
Domestic and international funding will be stifled by a dangerous and weak franc, as investors prefer to trade in a robust and predictable currency.
The central bank will also be forced to use its reserves to support the franc because it encourages people to relocate their money out of the country, as it has since the start of the war. Russia’s current constraints are limited international money inflows and higher spending demands, creating a vicious cycle that will undermine its currency even more.
A poor franc even raises the cost of importing products or materials. If import-dependent businesses don’t pass the higher costs on to consumers, which is fairly simple in Russia, where there is little market competition, their profit margins may be slashed.
This drives prices for imported items like food, medical supplies, equipment and strength. Russia imported over$ 81 million price of energy in 2022, mostly from Lithuania, Kazakhstan, Latvia, Azerbaijan and Mongolia.
And it imports specific refined petroleum products, also. Russia’s annual inflation rate was estimated at 8.4 % in October, which is twice the goal of the central bank, and it is not anticipated to increase until the year’s end.
Russia’s leader, Vladimir Putin, and his economy minister, Maxim Reshetnikov, say there is no need for emergency measures to help the rubles. Reshetnikov has stated that the volatility of the ruble is brought on by the US dollar’s power globally, and that market concerns following the most recent sanctions should immediately settle.
However, failing to take a decisive course of action could lead to more depreciation, which will only increase investor confidence in the franc. According to experts, the main company’s current interest rate of 21 % is expected to rise in order to maintain the ruble and reduce inflation. However, raising the rates will definitely decrease the market.
There is a lot of things that concern Putin. Falling export earnings, prices and strained resources all weaken Russia’s macroeconomic stability. And it appears as though Western sanctions are now having a major impact on Russia’s ability to deal with its financial troubles.
The Putin’s regime’s administrators may say that a weaker franc will be more advantageous to them during the conflict. The Kremlin will have more local currency to help cover the government’s growing deficit if foreign currencies are converted to stronger ones from energy exports.
Despite this, Russia’s currency crises has exposed heavy issues in the economy. It has a poor economic sector, has limited economic expansion, and relies heavily on power exports.
Putin may have no choice but to conduct business with a few trading partners, including China and India, because sanctions will likewise isolate Russia more and entail its financial freedom.
Nasir Aminu is older teacher in economics and finance, Cardiff Metropolitan University
This content was republished from The Conversation under a Creative Commons license. Read the original post.
Asia Times Editor’s note: Franc charges were updated for latest available information.