What's Up with the Ruble?

Over the past week, the Russian ruble has collapsed at its fastest rate since the spring of 2022 (the onset of Russia's War on Ukraine). Over just two days it lost 10 percent of its value against both the dollar and yuan. Since the beginning of September it has fallen 20 percent. Alexandra Prokopenko, a fellow at the Berlin Carnegie Russia Eurasia Center offered a convincing summary for The Bell. We summarize her article here.

What is going on?

The most immediate cause is the imposition a week ago of new US sanctions on more than 50 Russian banks, most notably Gazprombank, which had previously been the only large Russian bank that was not on the US blacklist. Some had expected that the US Treasury would issue Gazprombank a special license to service gas transactions, but that did not happen. This will now make it more difficult for Russia to receive income from raw material exports.

This problem was compounded by a decision the Kremlin made back in October, allowing exporters to only repatriate a quarter of their foreign exchange earnings, instead of half, as before. This staunched the supply of dollars and yuan, and has led to a ruble glut.

"Everyone is sitting in rubles, there is a ton of liquidity, but there is nowhere to convert it," a treasury employee at a Russian bank told Prokopenko.

Add to this (1) changes that have occurred in the Russian currency market since the introduction of American sanctions against the Moscow Exchange, (2) limits on the fixed price Russia can charge for oil (due to sanctions), (3) the lack of non-raw-material sources for export revenues, and (4) increased costs of imports.

It’s a perfect storm aimed at weakening the ruble.

Plus, the federal budget is putting additional pressure on the ruble. Expenditures in the fourth quarter grew by R1.5 trillion, which poured more rubles in the system. This fuels inflation expectations and juices up demand for foreign currency as a way to preserve the value of one’s savings.

What can the Kremlin do?

Not much.

The National Welfare Fund (NWF), designed as a sort of rainy-day fund, is at an abysmally low $31 billion (and is worth even less when evaluated in real terms). Meanwhile, the Central Bank's main tool has been to refuse to purchase foreign currency on the domestic market, trimming demand slightly.

The reality is that the ruble is “doomed to volatility,” according to Prokopenko. Any serious intervention to stabilize it will be too costly, so authorities are most likely to just make “verbal interventions,” like reassuring people that exchange rates are merely psychological, or turning the screws on exporters and forcing them to repatriate more dollars.

As Prokopenko summarizes: “as long as the Russian economy depends on imports and sanctions are in place, the ruble is doomed to weaken. But, for political reasons, economic authorities cannot acknowledge the effect of sanctions.