The ruble has plummeted to its weakest point against the U.S. dollar since the onset of Russia’s invasion of Ukraine, primarily due to new U.S. sanctions that have further strained the country’s wartime economy. On Wednesday, Russia’s central bank announced a halt to foreign currency purchases for the remainder of the year, as the ruble fell beyond 110 to the dollar, marking a one-third decline since early August. The central bank stated that this move aims to stabilize financial market volatility.
This downturn follows recent sanctions imposed by the U.S. on Gazprombank, Russia’s third-largest bank, and its foreign subsidiaries, which have historically facilitated most foreign payments for natural gas exports. In light of Europe securing alternative energy supplies, the reliance on Russian gas has significantly diminished.
The U.S. Treasury and State Departments noted that these sanctions are expected to hinder the Kremlin’s ability to circumvent existing sanctions and to fund its military operations. Notably, Canada and the U.K. have previously sanctioned Gazprombank, adding to the pressure on the Russian economy.
Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest bank, remarked that the sanctions on Gazprombank have notably affected the ruble, eliminating a channel for foreign currency transactions in the Moscow Exchange.
In recent comments, Russia’s Finance Minister Anton Siluanov expressed that a weaker ruble could be beneficial for exporters, indicating that the government might be willing to allow the currency to depreciate further. New economic data suggests that the Russian economy is exhibiting signs of overheating as it adapts to the demands of the ongoing conflict in Ukraine, leading to a reduction in the labor force.
Real wages have surged by 8.4% year-on-year as of September, while unemployment reached a record low of 2.3% in October. However, inflation remains a critical issue, stubbornly hovering around 8%, double the central bank’s target. In a bid to control inflation, the central bank raised its base interest rate to a historic high of 21% last month, but substantial military spending and support for the labor force complicate these efforts.
Experts have indicated that the surge in inflation is partly due to increased military recruitment incentives that have driven up salaries across various sectors, further complicating the economic landscape. According to central bank estimates, a 10% depreciation of the ruble could add 0.5 percentage points to inflation, suggesting that the recent decline could contribute to a 1.5% rise in the inflation rate.
Economists are warning of a potential stagflation scenario—characterized by high inflation coupled with low growth. With over a third of the upcoming budget allocated to the military-industrial sector, the focus remains on sustaining the war efforts in Ukraine. Concerns are growing about a possible economic crisis should the war conclude, as business activity may not rebound swiftly.
As the situation evolves, the fate of workers, soldiers, and the broader economic structure hangs in the balance, raising pressing questions about the sustainability of current military pay and its implications for the Russian economy should the conflict end.
