Putin's economy is suffering from inflation

The Russian ruble is plummeting. The value of the Russian currency is lower than it has been since the war began.

The Russian ruble has lost nearly a quarter of its value since early August. The exchange rate has since plunged more than 24% compared with the dollar and yuan. According to data provider LSEG, one dollar cost 106.50 rubles on Wednesday, an increase of 0.86% from the previous day. The ruble last depreciated in March 2022, the first month after Russia's invasion of Ukraine began. Compared with the yuan, the yuan fell 0.51% to 14.74, also its lowest level in more than two years.

The sharp decline surprised economists. They had predicted in a Reuters poll in early November that the Russian currency would hold the 100 mark against the dollar. “The market is waiting for the reaction of the financial authorities to the depreciation of the ruble,” explained analysts at brokerage BCS. In their view, buying currencies is akin to “panic in an uncertain environment.”

Inflation may rise in Russia

A weak domestic currency could fuel inflation in Russia. Because imported products become more expensive as a result. The central bank estimates that a 10% devaluation of the ruble would increase inflation by 0.5 percentage points. Economist Yevgeny Kogan said: “This poses a challenge for central banks to deal with rising prices.” Monetary authorities are trying to deal with the problem by raising the key interest rate to 21%, the highest level since 2003.

Vladimir Putin won't be happy: A weak currency could fuel inflation in Russia.Image: trapezoid

Some analysts now predict that the ruble could fall to between 115 and 120 per dollar by the end of the year. To prevent this, exporters may be forced to sell more foreign currency.

Sanctions exacerbate ruble depreciation

New sanctions targeting Russia's financial sector have exacerbated the ruble's recent depreciation. Analysts said this led to disruptions in foreign trade payments, especially in the oil and gas sector. Most major Russian banks, including Gazprombank, are now affected by U.S. sanctions and are therefore unable to conduct banking transactions in U.S. dollars. Their only option for trading foreign exchange is to import large amounts of US dollar cash.

Finance Minister Anton Siluanov believes a weak ruble has its advantages. “I'm not saying the exchange rate is good or bad,” he told a financial conference in Moscow on Tuesday. “I'm just saying that the exchange rate today is very, very favorable for exporters.” It also helps the Russian government get more government revenue from energy taxes and export duties.

“We believe the main reason for such a sharp weakening is that it is desirable,” said Nikolai Dudschenko, an analyst at financial institution Finam. “The exchange rate is very conducive to balancing the budget.”

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