Economy staggers

Ruble plummets – major setback for Putin

The downturn in the Russian economy continues and is putting Putin's central bank under pressure.

(Bild: AFP)

An "environment of uncertainty" is currently causing massive problems for the Russian currency, the rouble. Since the beginning of August, it has lost almost a quarter of its value. This is likely to further exacerbate the economic situation for Russians - as inflation is now threatening to rise even more than it already has.

The exchange rate has since slumped by more than 24 percent against the US dollar and the Chinese yuan. According to the data provider LSEG, 106.40 roubles had to be paid for one dollar on Wednesday - 0.86 percent more than the previous day.

The last time the rouble was worth less was in March 2022, the first month after the start of the Russian invasion of Ukraine. Compared to the yuan, it fell by 0.51% to 14.74, also its lowest level in more than two and a half years.

Central bank chief Nabiullina is worried - the rouble is losing more and more of its value.

(Bild: APA/AFP/Olga MALTSEVA)

Sharp decline comes as a surprise
The sharp fall comes as a surprise to economists. In a Reuters survey at the beginning of November, they had expected the Russian currency to defend the 100 mark against the dollar. "The market is waiting for the reaction of the financial authorities to the devaluation of the rouble," explained the analysts from the broker BCS. In their opinion, the currency purchases resembled "panic in an environment of uncertainty".

Central bank faces immense challenge
The weakening national currency is likely to fuel inflation in Russia. This is because imports will become more expensive. The central bank estimates that a ten percent devaluation of the rouble will increase the inflation rate by 0.5 percentage points. "This represents a challenge for the central bank in the fight against rising prices," said economist Yevgeny Kogan. The monetary authorities are trying to counter this by raising their key interest rate to 21 percent - the highest level since 2003.

Some analysts are now predicting that the rouble could slide to a value of 115 to 120 to the dollar before the end of the year. To prevent this, exporters could be forced to sell more foreign currency, for example.

New sanction reinforces fall in exchange rate
The most recent fall in the rouble exchange rate has been exacerbated by the new sanctions against the Russian financial sector. According to analysts, this is leading to interruptions in payments for foreign trade - particularly for oil and gas. Most major Russian banks - including Gazprombank - are now affected by US sanctions and are therefore unable to carry out banking transactions in dollars. The only remaining option for them to trade in foreign currency is to import large amounts of dollar cash.

Exchange rate drop to balance the budget?
Finance Minister Anton Siluanov sees an advantage in the weakness of the rouble. "I'm not saying whether the exchange rate is good or bad," he said at 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 to generate more state revenue from energy taxes and export duties.

"In our opinion, the main reason for such a significant weakening is that it is desirable," said analyst Nikolai Dudzhenko from the financial firm Finam. "The exchange rate is very conducive to balancing the budget."