The ruble, the Russian national currency, has suffered a sharp drop in recent monthsand the central bank has stepped in to try to stop it.
Until now, the government had just watched, as the fall favored its budget. But the weakness of the currency can affect people’s daily lives with price increases, and the government has finally stepped in.
Some ruble keys:
Why does the ruble fall?
Basic economics plays a role, though that’s not all. Russian exports are falling —as reflected in the drop in income from the sale of oil and natural gas— and imports increase. When importing, people or companies must exchange rubles for dollars or euros. That tends to lower the ruble exchange rate.
Russia’s trade surplus—meaning it sells abroad more than it buys—has narrowed. The trade surplus usually supports the national currency. In previous months, Russia’s trade surplus was large because the invasion of Ukraine caused oil prices to rise and imports to plummet.
But this year oil prices have fallen and Western sanctions, such as cs on the prices of crude oil and derivatives such as diesel, have hampered sales.
“The significantly lower inflow of foreign currency due to falling exports is the key driver” of the ruble’s decline, according to the Kiev Institute of Economics.
Meanwhile, imports have started to increase after a year and a half of war as the Russians find a way to evade sanctions. Part of the trade is carried out through Asian countries that do not participate in the sanctions. And importers have found a way to transport goods through Armenia, Georgia, Kazakhstan and other neighboring countries.
At the same time, Russia has increased its defense spending, for example, with the injection of funds into arms-manufacturing companies. They must import components and raw materials, and part of the government spending finds its way into the pockets of workers, because Russia suffers from labor shortages.
That government spending, added to purchases of Russian oil by China and India, helps the economy outperform. The International Monetary Fund said last month that it expects growth in the Russian economy of 1.5% this year.
Why did he raise interest rates?
First of all, to fight inflation. A weakened ruble exacerbates inflation by making imports in Russian currency more expensive. And the weakness of the ruble is increasingly being transmitted to the prices that people pay.
Inflation reached 7.4% in the last three monthsand the central bank’s target is 4%.
The increase in interest rates makes credit more expensive, and this should limit domestic demand for goods, including imported ones. So the central bank tries to cool the economy to lower inflation.
It raised its benchmark interest rate to 12% from 8.5% in an emergency meeting on Tuesday after a Kremlin economic adviser deplored the ruble’s slide.
Are the sanctions effective?
Yes and no. exports have fallen because the Western allies have boycotted Russian oil and cped the prices of those exports to non-Western countries. The sanctions prevent insurers or transporters — mainly Western ones — from handling Russian oil above $60 a barrel.
The c and boycott imposed at the end of last year have forced Russia to sell at a discount and take expensive measures such as obtaining a fleet of ghost tankers unreachable by sanctions. And Russia stopped selling natural gas to Europe, its main customer.
Oil revenues fell 23% in the first half, but Russia continued to earn 425 million dollars a day from the sale of crude oilaccording to the kyiv Faculty of Economics.
The rebound in imports shows that Russia has been able to evade sanctions and boycotts. It is more expensive and difficult, but anyone who wants an iPhone or a Western-made car can get it.
So the causes of the fall of the ruble were sanctions, success in evading their impact, and the war itself.
Is Russia in an economic crisis?
No, says Chris Weafer, CEO of Macro Advisory Partners. “The fall of the ruble partly reflects the effect of the sanctions, but It is not indicative of an underlying economic crisis.”
The fall of the ruble has been favorable to the government in several ways. A low exchange rate means you get more rubles for every dollar you earn from selling crude oil and other products. That allows him to increase spending on the military and social programs to mitigate the impact of sanctions on the Russian people.
“What the central bank and the Ministry of Finance have done in recent months is to try to offset the fall in the dollar value of oil sales with the weakness of the ruble, so that, therefore, the deficit in of spending becomes more content and manageableWeafer said.
Amid sanctions and restrictions on moving money out of the country, the ruble’s exchange rate is largely in the hands of the central bank, which can advise big exporters when to exchange their dollar earnings for Russian currency.
But when the exchange rate dropped below 100the Kremlin and the central bank said enough is enough.
“Weakness was expected, but it’s been exaggerated and they want to go back,” said Weafer, who sees an exchange rate of around 95 in the coming months, just as the government wants.
And the daily life of Russians?
Inflation caused by the devaluation of the ruble It mainly affects the poorest.who must spend a higher proportion of their income on food and other basic necessities.
Travel abroad—enjoyed by a minority in prosperous cities like Moscow and St. Petersburg— they get much more expensive with the fall of the ruble.
In any case, the government responds to popular discontent with repression, including prison sentences for those who dare to criticize the war.
“The instability of the national currency always has a not very good impact,” said Dina Solovyova, a 51-year-old veterinarian. “Most likely, it will affect ordinary people, because the increase in prices for everything will be inevitable. We will see”.
Nikolay Rubtsov, 20, said he was not overly concerned.
“This is temporary. I think everything will return to normal in a short time.. I don’t think it can last long,” Rubtsov said in Moscow.