The Russian ruble has fallen to its lowest point against the U.S. dollar since the onset of the invasion of Ukraine, largely due to new U.S. sanctions that signal a struggling wartime economy. On Wednesday, the Central Bank of Russia announced it would halt foreign currency purchases for the remainder of the year after the ruble fell beyond 110 rubles per dollar, marking a one-third decrease since early August. This decision was made to mitigate financial market volatility. The decline followed recent sanctions imposed by the U.S. on Gazprombank, Russia’s third-largest bank, and its six foreign subsidiaries, which facilitate most foreign payments for natural gas exports. Previously, sanctions had exempted Russian gas due to Europe’s heavy reliance on it, but nations have since found alternatives and reduced their dependence on Russian energy.
The U.S. Treasury and State Departments noted that these new measures would complicate the Kremlin’s ability to circumvent existing U.S. sanctions and support its military operations. Canada and the U.K. have also imposed sanctions on Gazprombank. Dmitry Pyanov, deputy CEO of VTB, Russia’s second-largest bank, indicated that the sanctions have significantly impacted the ruble, disrupting foreign currency flow to the Moscow Exchange.
Anton Siluanov, Russia’s finance minister, remarked that a weaker ruble could be advantageous for exporters, hinting that the government may be willing to tolerate the declining exchange rate. Recent economic data reveal a labor market transformed by the war, with real wages rising by 8.4% year-on-year in September, unemployment at a historic low of 2.3% in October, and weekly inflation nearing 0.4%. However, overall inflation remains high at around 8%, double the central bank’s target. To combat inflation, the central bank raised its base interest rate to a record 21%.
Experts suggest that high military spending and labor shortages are driving inflation, with wages in various industries increasing due to recruitment efforts for the war. The ruble’s decline is expected to exacerbate inflation, with estimates suggesting a 10% drop in currency value could increase inflation by half a percentage point. This signals a challenging landscape for the central bank, which is struggling to rein in prices.
Economists have warned that the economy may be entering a phase of stagflation, characterized by high inflation coupled with low growth. With over a third of next year’s budget allocated to the military sector, concerns about a potential economic crisis linger if the war were to end, as businesses may not rebound immediately. This situation raises questions about the future of soldiers receiving high pay during the conflict, posing a dilemma for the Kremlin as the economy grapples with these challenges.
