Moscow – Russia’s central bank announced on Wednesday that it will halt foreign currency purchases to alleviate pressure on financial markets, following a significant depreciation of the ruble, which has now fallen past 110 to the U.S. dollar—a drop of one-third since early August. The central bank plans to suspend foreign currency acquisitions on the domestic market from November 28 until the end of the year, pushing these purchases to 2025. This decision is aimed at reducing financial market volatility. After being barred from utilizing the dollar and euro, Russia has conducted foreign exchange interventions utilizing the Chinese yuan.
Recent economic data from Russia indicated signs of overheating in an economy refashioned to support its war efforts in Ukraine, which has led to a reduction in the labor force. Real wages increased by 8.4% year-on-year in September, while unemployment dipped to a record low of 2.3% in October, amid a weekly inflation rate nearing 0.4%, despite a high benchmark interest rate of 21%.
As of 1600 GMT, the ruble experienced a 7.25% decline since the start of Wednesday’s trading, reaching 113.15 to the dollar, further driving inflation, which currently stands around 8% annually. It also fell below 15 to the yuan, marking its lowest point since March 2022, soon after the onset of the Ukraine invasion.
According to Russia’s budget regulations, the finance ministry sells foreign currency from its National Wealth Fund to offset any revenue shortfall from oil and gas exports, or makes purchases when there is a surplus. The central bank manages these forex transactions and performs its own interventions.
The central bank has committed to continuing its yuan sales at a rate equivalent to 8.4 billion rubles daily, effectively doubling its net daily foreign currency sales.
Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest lender, attributed the ruble’s dramatic decline to U.S. sanctions against Gazprombank, the country’s third-largest bank that facilitates energy trading. He expressed concern that these sanctions have disrupted the flow of foreign currency to the Moscow Exchange.
Analysts from PSB Bank indicated that while the central bank’s decision may provide moderate support to the ruble, it would not suffice to restore the exchange rate to previous levels, anticipating continued market volatility. Furthermore, the ruble’s decline has been exacerbated by a more than 20% drop in the stock market this year as investors pivot their savings from equities to deposits, which yield interest rates above the benchmark.
Economy Minister Maxim Reshetnikov suggested that the ruble’s instability stemmed from the global strength of the dollar and market anxieties following new sanctions, rather than fundamental economic issues, and predicted that the situation would stabilize soon.
Additionally, he noted that a significant majority of Russia’s trade—82% of exports and 78% of imports—is conducted in rubles and currencies from non-western, ‘friendly’ nations. Some analysts proposed that the government might increase mandatory foreign currency sales by exporters, although there are doubts about its effectiveness due to sanctions-related transaction difficulties.
The ruble’s depreciation is contributing to inflation, which is expected to surpass the central bank’s expectations for the year, counteracting its efforts at monetary tightening, with the interest rate at its highest since 2003. The central bank estimates that a 10% decrease in the ruble’s value adds 0.5 percentage points to inflation, indicating that the recent fall could be contributing an additional 1.5 percentage points.
Following the imposition of western sanctions, all dollar and euro trades have shifted to the over-the-counter market, resulting in increased volatility and opacity in trading practices, with most banks only providing data to regulators.
