2023-08-18 18:02:36
BarcelonaThe ruble, the Russian currency, continues its decline in the foreign exchange markets and is now worth only one cent to the dollar. Sanctions imposed by Western countries have gradually eroded the exchange rate to the lowest levels recorded by the currency since the invasion of Ukraine in February 2022.
The ruble continues to collapse
Quotation of the ruble in US dollars since January 1, 2008
Responding to the ruble’s deterioration, Russia’s Central Bank held an emergency meeting on Tuesday to approve a 3.5 percentage point increase in interest rates to 12%. For comparison, in the euro zone the basic rates are at 4.25%, half a point below the historical maximum, recorded in 2001.
This increase in the price of money aims to prevent the outflow of capital from Russia abroad, one of the elements that favors the devaluation of the ruble, since the supply on the market increases while the demand for foreign currencies, especially dollars and euros. A rate hike allows higher returns on bank deposits in Russia and ruble-denominated debt securities, giving investors more incentive to demand assets in that currency.
Conversely, rate hikes also have a depressing effect on economic activity, making credit more expensive for Russian citizens and businesses, so they have less access to money that they would use to consume or invest in the country.
Insufficient initial measures
The Russian currency had already suffered a sharp drop in value with the start of the war, but the country’s central bank imposed capital controls, meaning it limited the amount of money per person that can be exchanged into foreign currencies With this measure, the Kremlin achieved two things: to avoid the bankruptcy of the banks, which were suffering from a massive withdrawal of savings from their customers, and to quickly recover the initial value of the ruble, which had already collapsed in 2014 following the first Western sanctions for the Russian occupation of Crimea and part of the Donbass. Who paid for it were the citizens of the country, who cannot touch the bulk of their savings as they lose value with each passing day.
However, the improvement after the initial shock was temporary. “Capital controls were a quick fix for the ruble in 2022, but they are counterproductive in the long run,” Janis Kluge, an analyst specializing in the Russian economy at the think tank German SWP. In fact, according to Financial Timesthis Wednesday the Russian president, Vladimir Putin, met with his economic team to discuss the possibility of tightening capital controls in order to stop the devaluation of the currency, but of all his advisers, the minister of Economy, Anton Siluànov, was left alone defending them.
Since 2014, Russian Central Bank Governor Elvira Nabiullina had predicted that the West would possibly extend sanctions on Russia, so she hoarded more than $600 billion in foreign currencies to be able to buy and sell in order to keep the ruble’s price stable in the markets. Nabiullina’s mistake, however, was not to anticipate that the US and other countries would freeze about half of the reserves held in Western banks, which has greatly reduced Moscow’s ability to maneuver to stabilize its currency
More imports, less exports
The ruble has also been losing value for the past year, eroded by the different packages of sanctions that the United States, the European Union and the rest of Ukraine’s allied states have been imposing on Moscow. First was the expulsion of Russian banks from the Swift transfer system, which left the country’s entities disconnected from most Western banks, a move to which was added the exit from Russia of payment companies such as Visa, Mastercard or Paypal, which make it even more complicated to receive or send money between Russia and abroad.
These difficulties to pay have affected the ability of Russian companies to trade with other countries. In addition, the sanctions have also severely affected the country’s industry, as the EU and the US have banned the sale to Russian companies of key electronic components for the manufacture of vehicles, household appliances and other industrial products that, in part , Russia also exported. This has meant that the products that were manufactured within the country and that served as an input for foreign currencies now have to be bought abroad. That is, instead of being a source of foreign currency inflow, the industry now represents a drain on the country’s foreign exchange reserves.
Energy sales plummet
Another reason for the weakness of the ruble is the drop in income from the export of oil, natural gas and coal, which had the EU as its main partner. The sanctions, however, have had a direct impact on hydrocarbon exports: if in March 2022 the EU bought hydrocarbons from Russia worth more than 750 million per day, since last March the figure has fluctuated between 50 and the 80 million per day. Sales in India and China have not made up for it.
This means that the euros entering the coffers of Russian energy companies – with strong state holdings – have been decreasing. The desire of countries such as Germany to diversify their electricity production and to bet on renewables instead of natural gas plants has led to the EU’s search for new partners – such as the USA, Australia or Qatar – and the maximum price of 60 euros per barrel imposed by the EU and the G-7 on Russian oil.
Soaring public deficit
In the first half of 2022, the Kremlin announced a surplus of 2.6 trillion rubles (about 25 billion euros), but a year later the Russian administration was in the red by 1.48 trillion rubles (about 14,000 million euros). The difference is mainly due to the aforementioned energy sanctions, which have reduced the state’s income substantially.
To this fact is added the lower economic activity derived from the sanctions, the shortages in the industry and the growing deficit with the outside world, which results in lower tax collection. In addition, the Russian government has had to increase military spending above what it had planned to deal with the war in Ukraine, both to maintain the winter offensive – which ended with the pyrrhic capture of Bakhmut – as to prepare the defenses for the Ukrainian counter-offensive this summer in the south of the country.
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