In a significant move to stabilize its financial markets, Russia’s central bank announced it would halt foreign currency purchases, responding to the ruble’s alarming drop beyond 110 against the U.S. dollar. This marks a stark decline of one-third since early August. The central bank’s decision to suspend these purchases until 2025 aims to mitigate market volatility, particularly as foreign exchange interventions have shifted to the Chinese yuan after restrictions on using the dollar and euro.
Recent economic data reveals troubling signs of an overheating economy as Russia continues to adjust its financial strategies amid the ongoing conflict in Ukraine. Real wages saw an increase of 8.4% year-on-year in September, while unemployment reached a record low of 2.3% in October. However, inflation continues to pose a significant threat, currently sitting at around 8% annually, despite a high benchmark interest rate of 21%.
As of the latest trading reports, the ruble has depreciated by 7.25%, now trading at approximately 113.15 to the dollar. This depreciation further fuels inflationary pressures, with the currency also falling to its lowest level against the yuan since March 2022, shortly after the start of the Ukraine invasion.
Under the country’s budget regulations, the finance ministry utilizes funds from its National Wealth Fund to compensate for revenue shortfalls from oil and gas exports. The central bank manages these foreign exchange transactions while conducting its own interventions.
Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest bank, attributes the ruble’s decline to U.S. sanctions on Gazprombank, which has disrupted the flow of foreign currency to the Moscow Exchange. Pyanov emphasized the urgent need for the central bank to stabilize the currency market, which is currently experiencing significant dysfunction.
Analysts from PSB Bank indicated that while the recent measures might provide moderate support for the ruble, they are unlikely to restore the currency to its previous levels, predicting ongoing volatility in the market.
The ruble’s downfall is exacerbated by a stock market decline exceeding 20% this year, prompting investors to shift their assets from stocks to deposits offering higher interest rates. Economy Minister Maxim Reshetnikov explained that the ruble’s fluctuations stem from global dollar strength and market anxieties following the recent sanctions rather than fundamental economic issues, suggesting stabilization may occur soon.
Furthermore, Reshetnikov noted that a significant portion of Russia’s international trade is conducted in rubles and currencies of ‘friendly’ nations, which may cushion the impact of these economic challenges. Economic experts have proposed the government might enforce stricter foreign currency sale requirements for exporters, although skepticism remains regarding its effectiveness in the face of existing sanctions.
In light of these developments, the central bank estimates that the ruble’s depreciation could add approximately 1.5 percentage points to inflation this year. With the shift of dollar and euro trades to the over-the-counter market following sanctions, the trading landscape has become increasingly volatile and opaque, with banks providing limited data to regulators. This ongoing financial turmoil presents a complex challenge for Russia as it navigates its economic landscape amidst international sanctions and internal pressures.
