The ruble of Russia has reached its lowest value against the U.S. dollar since the onset of the full-scale invasion of Ukraine, a decline attributed to new U.S. sanctions and an indication of the challenges facing the wartime economy. On Wednesday, Russia’s central bank announced a halt to foreign currency purchases for the remainder of the year after the ruble depreciated to over 110 rubles per dollar, marking a one-third drop since early August. The central bank stated that this decision aims to mitigate financial market volatility.
This decline follows the U.S. imposing sanctions on Gazprombank, Russia’s third-largest bank, and its six foreign subsidiaries, which have been crucial for foreign payments related to natural gas exports. Previously, sanctions had avoided targeting Russian gas, given Europe’s heavy reliance on it; however, Europe has since sought alternative sources and reduced its dependency on Russian gas.
The U.S. Treasury and State Departments indicated that these new sanctions would complicate the Kremlin’s efforts to circumvent existing U.S. sanctions while funding its military endeavors. Canada and the U.K. have also imposed sanctions on Gazprombank. Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest bank, remarked that the U.S. sanctions likely had a notable impact on the ruble, as it has lost its role as a channel for foreign currency to the Moscow Exchange.
Anton Siluanov, Russia’s finance minister, stated that a weaker ruble could be beneficial for exporters, implying that the Kremlin might not be concerned with the ruble’s decline. Recent economic data published by Russia highlighted the overheating in an economy reshaped to support the ongoing war in Ukraine, which has resulted in a significant loss of labor.
As of September, real wages increased by 8.4% year-on-year, and unemployment dropped to a record low of 2.3% in October, with weekly inflation nearing 0.4%. Despite this, overall inflation remains stubbornly around 8%, double the central bank’s target. Last month, the central bank raised interest rates to a historic high of 21% in an attempt to control inflation, but extensive government spending on military operations and the workforce has complicated these efforts.
Lisa Sundstrom, a political science professor at the University of British Columbia, noted that the rising salaries paid to those involved in the war are contributing to inflation. Moreover, the decline of the ruble could exacerbate inflation further, as the central bank estimates indicate that a 10% depreciation of the currency adds 0.5 percentage points to inflation. This suggests that the ruble’s four-month decline could contribute an additional 1.5% to the current inflation rate.
Economists warn that Russia is entering a phase of stagflation—characterized by high inflation and low economic growth. The military-industrial complex is set to receive more than one-third of the budget for the upcoming year as Moscow continues its military operations in Ukraine. Sundstrom cautioned that an economic crisis could emerge if the war concludes, leaving significant challenges regarding the future of the soldiers who have been receiving substantial payments. She questioned the feasibility of maintaining such payments if military funding were to cease.
