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ohn 14 August The Russian ruble slipped past 100 to the US dollar, making it worth less than a solitary hundred – the cheapest it had been since immediately after the invasion of Ukraine . The currency is one of the world’s worst performers this year, surpassed only by troubled peers like the Argentine peso, Venezuelan bolivar and Turkish lira.
The next day Russian monetary policy makers intervened, scrambling to respond to events for the first time since the beginning of the war. The Bank of Russia raised interest rates by 3.5 percentage points, to 12%. Although the ruble rose slightly on the news, it is still, at 96 to the dollar, much cheaper than the level of 60 or so at this time last year. Rate hikes are unlikely to stop the currency’s decline anytime soon, with implications for Vladimir Putin’s ability to pay for war.
Currency collapses are often triggered by nervous international investors or fleeing domestic capital. But trading in the ruble, especially against the dollar, is still thin. Sanctions and capital controls have left Russia isolated. Rather than reflecting the aggregated views of speculators, the ruble fluctuates according to the textbook economic model, reflecting the relative strength of exports (which earn foreign currency) and imports (which ‘ must be paid with these earnings).
Because the g7 caps put the price of $ 60 on Russian oil in December, the value of exports has decreased. Russian earnings were 15% lower in dollar terms between January and July than in the same period last year, which was not entirely explained by lower global oil prices. At the same time, imports have increased as the government prosecutes its war, and buys the goods to do so. In the first seven months of the year, Russia’s current account surplus, a measure of how much more foreign currency the country receives than it spends, fell by 86% to $25bn.
On the one hand, this shows that the oil price cap has some effect. Efforts to avoid the policy do not make up for having to sell oil at a discount. On the other hand, he suggests that Russia is looking for ways to import goods. German exports to friendly neighbors Russia, for example, have increased suspiciously.
Cheap currency increases the ruble value of the government’s oil revenue, but it also increases the cost of imports. In June Andrei Belousov, the deputy prime minister of Russia, said that the value at the time, of 80-90 rubles per dollar, was the best for the country. When the ruble was much stronger last year, the Russian government was happy to use it as evidence that Western sanctions were failing. That confidence is gone now. On August 14, Maxim Oreshkin, an adviser to Mr. Putin, wrote a column stressing the need for a strong ruble and blaming the collapse of the central bank.
Raising the emergency rate of the ruble helped little. Russia’s isolation means that higher interest rates are unlikely to attract “hot money” (speculative money seeking short-term returns). The focus may now turn to the fledgling home capital. Strengthening capital controls could stem the flow, but it would take time to have an effect. As this piece was published, it was being reported that the government was about to meet to decide whether to force exporters to sell foreign currency earnings.
Direct intervention in currency markets is another option. The central bank has stopped buying foreign currency. Under budget rule, Russia used to buy other currencies in exchange for rubles if it had a surplus of oil and gas revenues, to build up reserves. On August 9 this rule was abandoned. According to official figures, the country had foreign currency reserves of $587bn at the beginning of August, suggesting that the central bank has the firepower to prop up the ruble. The problem is that about $300bn of these reserves are frozen by the West.
If the government doesn’t get more oil revenue, they have a choice. The state could cut back on spending, including on its armed forces, to reduce imports. On the other hand, the civilian economy will take the pain. Rising inflation and higher interest rates weaken the purchasing power of ordinary Russians, forcing them to buy fewer foreign goods. So the fate of the Russian economy will not be decided by the judgments of international financiers but by the depth of Mr Putin’s attack. It’s a much more unpleasant situation to be stuck in. ■
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