In a significant move to stabilize its financial markets, Russia’s central bank announced on Wednesday that it will halt foreign currency purchases after the ruble’s value plunged beyond 110 to the U.S. dollar, representing a one-third decrease since early August. The bank’s decision to suspend purchases from November 28 until the year’s end, with plans to defer them until 2025, aims to alleviate market volatility. This latest economic strategy comes in light of Russia’s ongoing exclusion from dollar and euro transactions, which has forced the country to utilize the Chinese yuan for foreign exchange interventions.
Recent economic data released by Russia indicates troubling signs of overheating in an economy reshaped by the ongoing conflict in Ukraine, leading to significant labor market disruptions. Real wages surged by 8.4% year-on-year in September, while unemployment reached a historic low of 2.3% in October. Weekly inflation is currently nearly 0.4%, despite a benchmark interest rate set at a staggering 21%.
As of 1600 GMT on Wednesday, the ruble had fallen by 7.25%, trading at 113.15 to the dollar, which has further intensified inflation, now hovering around 8% annually. The currency’s value also dropped below 15 to the yuan, marking the lowest point since March 2022, shortly after the onset of the Ukraine invasion.
Under current budget regulations, the Russian finance ministry is tasked with selling foreign currency from its National Wealth Fund to offset any revenue shortfall from oil and gas exports. The central bank, which oversees these foreign exchange transactions, is also continuing its own yuan sales, increasing net daily foreign currency sales to approximately 8.4 billion rubles, up from about 4.2 billion rubles.
Dmitry Pyanov, the deputy CEO of VTB, Russia’s second-largest bank, attributed the ruble’s drastic decline to U.S. sanctions on Gazprombank, which has historically facilitated foreign currency transactions. Pyanov called for the central bank to prioritize the stabilization of the currency market, which he described as dysfunctional at present.
Furthermore, analysts from PSB Bank indicated that while the central bank’s decision may provide moderate support to the ruble, it is unlikely to restore the exchange rate to previous levels, forecasting continued market volatility. The ruble’s decline has been exacerbated by a more than 20% drop in the stock market this year, as investors increasingly favor deposits offering higher interest rates than the benchmark.
Economy Minister Maxim Reshetnikov attributed the ruble’s fluctuations to the strengthening of the global dollar and market apprehensions following recent sanctions rather than fundamental economic issues, expressing optimism about a potential stabilization soon.
He noted that 82% of Russian exports and 78% of imports are settled in rubles and currencies from ‘friendly’ non-Western nations. Some analysts have suggested increasing mandatory foreign currency sales from exporters, though the effectiveness of such measures remains uncertain. Economists warn that the ruble’s depreciation is likely to drive inflation above the central bank’s projections, countering its efforts to tighten monetary policy, with the current interest rate at its highest since 2003. The central bank estimates that a 10% drop in the ruble’s value increases inflation by 0.5 percentage points, implying that the recent declines may be contributing an additional 1.5 points to inflation.
Since the imposition of Western sanctions, all dollar and euro trades have migrated to the over-the-counter market, leading to increased volatility and lack of transparency, with most banks only reporting data to regulators. This situation has left the financial landscape highly unpredictable for both consumers and investors alike.
