In recent news, an attempt to curb rampant inflation has led Russia’s central bank to halt all foreign currency purchases for the rest of the year. The bank is also actively selling Chinese yuan, hoping to bolster the value of the ruble. With the ruble’s worth currently a fraction of a penny, it sunk to lows on Wednesday not seen since the Ukraine war began.
The objective is to stabilize the ruble and limit further price pressure leaking into the nation through the rising cost of imported goods. The Russian economy is also experiencing a lack of foreign investment due to Western government sanctions that prohibit companies from doing business with Russia. This leaves most Russian financial institutions unable to trade in dollars, depriving the country of a steady supply of U.S. currency reserves.
The Bank of Russia stated on Wednesday that, “This decision is aimed at reducing volatility in financial markets.”
Official inflation rates in Russia hit a year-on-year peak above 9% percent in August and continue to remain elevated. Kirill Rogov, a Russian political scientist, believes these figures are likely understating the problem. He suggests actual rates could be significantly higher, citing data from Raiffeisen Bank analysts and market research firm ROMIR.
Fresh Economic Sanctions and the Impact on Russia’s Currency
The central bank’s announcement came one week after the U.S. government imposed fresh economic sanctions against Gazprombank. The bank had previously been exempt, as it plays a crucial role in enabling the export of natural gas to several American allies in Europe by processing cross-border payments.
On Wednesday, the ruble consequently fell below the rate of 114 to a dollar, the lowest level since early March 2022. Rossiyskaya Gazeta, a daily in Moscow, referred to it as a “panic attack for Russia’s currency market.”
Finance minister Anton Siluanov argued the plunge will benefit exporters, whose goods are suddenly much cheaper for foreigners to buy. But the risk is that a weak ruble will only end up importing inflation from abroad by driving up prices of imported foreign goods.
Unprecedented Inflation and Rising Interest Rates
Inflation began escalating in Russia after president Vladimir Putin directed hundreds of thousands of working age men to fight in Ukraine and rallied Russia’s industry to support its military objectives. The reduced availability of workers caused wages in the civilian economy to rise sharply. Rising labour prices were quickly passed on to consumers as supply struggled to meet domestic demand.
Consumer prices are soaring. The price of staples like potatoes has nearly doubled since last December. Butter is now so expensive that stores have locked away supplies to prevent theft. Mortgage loans also soared after the government ceased in July to provide generous subsidies to purchase an apartment or house.
In response to these pressures, the prime interest rate was hiked by two full percentage points to 21% in October, a level not seen since 2003. Despite this, inflation has not cooled off and the ruble continues to decline. This has led Russian business daily RBK to suggest on Wednesday that benchmark rates rise to an eye-watering level between 30%-40% to prop up the currency—even if this risks a slowdown in growth.
High Borrowing Rates: A Solution or a Problem?
Not everyone agrees with this approach. Severstal chairman Alexey Mordashov, a supplier of steel needed for the war effort, said the high borrowing rates were already painful. Worse, he argued they achieved comparatively little.
He was quoted by Politico as saying on Wednesday, “This is a situation probably without precedent in modern world history, when the central bank rate is 2.5 times higher than inflation and it still doesn’t slow down. It’s as if the medicine is more harmful than the disease.”
Russia’s struggle to contain consumer prices may provide the incoming Trump administration with more leverage to force Moscow to the negotiating table. On Wednesday, his transition team appointed Keith Kellogg as Special Envoy for Ukraine and Russia.
Russia responded to the latest escalation by launching for the first time an experimental MIRV intermediate range ballistic missile dubbed “Oreshnik” capable of being armed with multiple nuclear warheads. This has caused concerns that the conflict could escalate into a third world war before Trump assumes office in January.
