In a significant move to stabilize its economy, Russia’s central bank announced on Wednesday that it will halt foreign currency purchases until the end of the year, as the ruble has fallen below 110 against the U.S. dollar, reflecting a one-third depreciation since early August. The bank’s decision to pause these purchases from November 28th until 2025 aims to mitigate the volatility in financial markets.
The bank stated, ‘The decision was made to reduce the volatility of financial markets,’ highlighting the challenges faced since Russia was barred from using the dollar and euro, forcing it to rely on the Chinese yuan for foreign exchange interventions.
Recent economic data revealed concerning trends in Russia’s economy, which has been restructured to support the ongoing war in Ukraine. In September, real wages surged by 8.4% year-on-year, while unemployment reached a historic low of 2.3% in October, despite a benchmark interest rate of 21%. As of 1600 GMT on Wednesday, the ruble had dropped 7.25% during trading, trading at 113.15 against the dollar, further exacerbating inflation, currently estimated at around 8% annually.
The ruble also weakened to over 15 against the yuan, marking its lowest point since March 2022. Under the country’s budgetary framework, the finance ministry typically sells foreign currency from the National Wealth Fund to cover revenue shortfalls from oil and gas exports or to make purchases when there is a surplus.
Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest lender, attributed the ruble’s rapid decline to U.S. sanctions on Gazprombank, Russia’s third-largest lender, which has disrupted foreign currency flows to the Moscow Exchange. Pyanov emphasized that the central bank needs to stabilize the currency market, which he believes is currently dysfunctional.
Analysts from PSB Bank indicated that while the central bank’s recent decision may offer some support to the ruble, it will likely not suffice to restore the exchange rate to previous levels, predicting continued market volatility.
The ruble’s depreciation has been compounded by a more than 20% drop in the stock market this year, as investors pivot from equities to deposits that yield interest above the benchmark rate. Economy Minister Maxim Reshetnikov noted that the ruble’s fluctuations are primarily due to the strength of the dollar and market apprehension regarding recent sanctions, rather than fundamental economic issues, and predicted that stability would soon return.
Reshetnikov also pointed out that 82% of Russia’s exports and 78% of its imports are transacted in rubles and currencies from non-Western, ‘friendly’ countries. Some analysts suggested that increasing mandatory foreign currency sales from exporting companies could be a potential government strategy, although there is skepticism regarding its effectiveness amidst ongoing sanctions.
The ruble’s decline is fueling inflation, which is expected to surpass the central bank’s forecasts for the year, countering the regulator’s efforts to tighten monetary policy with the highest interest rates seen since 2003. The central bank estimates that a 10% drop in the ruble’s value contributes an additional 0.5 percentage points to inflation, suggesting that the currency’s decline over the last four months may be adding approximately 1.5 percentage points to inflation rates. Following the imposition of Western sanctions, all trade in dollars and euros shifted to the over-the-counter market, resulting in a volatile and opaque trading environment, with most banks only disclosing data to regulators.
