The Russian ruble has significantly declined, reaching its lowest point against the U.S. dollar since the onset of the Ukraine invasion, spurred by new U.S. sanctions that highlight the ongoing challenges of a wartime economy. In a move to stabilize financial markets, Russia’s central bank announced it would halt foreign currency purchases for the remainder of the year after the ruble sank past 110 to the dollar, marking a one-third drop since early August. This decision follows the U.S. imposing sanctions on Gazprombank, Russia’s third-largest bank, alongside its six foreign subsidiaries, which have predominantly managed foreign payments related to natural gas exports. Earlier sanctions had previously spared Russian gas due to Europe’s heavy reliance on it, but countries have now diversified their energy sources, reducing dependence on Russian supplies.
The U.S. treasury and state departments indicated that these new sanctions would hinder the Kremlin’s efforts to bypass existing restrictions and fund its military. Canada and the U.K. have also acted against Gazprombank. Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest bank, noted that the sanctions have had a considerable effect on the ruble, as they curtailed its role as a conduit for foreign currency transactions.
Russian Finance Minister Anton Siluanov remarked that a weaker ruble could greatly benefit exporters, implying a potential acceptance of a declining exchange rate by the Kremlin. New economic reports reveal signs of overheating within an economy repurposed for wartime, resulting in labor shortages as workers are recruited for military service.
Despite overall inflation remaining around eight percent—double the central bank’s target—real wages in September rose by 8.4%, and unemployment dipped to a historic low of 2.3% in October. The central bank raised its base interest rate to a record 21% to combat inflation, but extensive government spending on military efforts and the labor force complicates the situation. Experts point out that high salaries for military recruits are putting additional pressure on inflation levels.
The ruble’s depreciation may exacerbate inflationary trends, with estimates suggesting a 10% decline in currency value could increase inflation by half a percentage point. Economists have warned of a potential move towards stagflation, characterized by high inflation and stagnant growth. Furthermore, over a third of the upcoming budget is earmarked for military purposes as the war in Ukraine continues. Analysts caution that an economic crisis may arise if the conflict ceases, as businesses may not recover swiftly, and the fate of soldiers receiving substantial payments remains uncertain.
