Sanctions and War Push Russian Ruble to New Low Against the Dollar

The Russian ruble has experienced a significant decline, reaching its lowest value against the U.S. dollar since the early days of Russia's invasion of Ukraine. As of this week, the ruble fell to 110 per dollar, marking its worst performance since March 2022. This sharp depreciation is largely attributed to the ongoing impact of international sanctions and the continuing economic fallout from the war. Before the conflict began, the ruble had been trading at around 75-80 per dollar.

The drop in the ruble comes shortly after the United States imposed new sanctions targeting Russian financial institutions, including Gazprombank, one of the key banks handling payments for Russian natural gas exports to Europe. These sanctions have disrupted the flow of foreign currency into Russia, exacerbating the ruble's decline. Although European reliance on Russian energy has diminished, Moscow has redirected oil exports to markets like China and India, which has partially offset the economic blow. However, gas revenues, a major source of foreign income, remain under threat as more sanctions could further limit Russia’s earnings.

In response to the weakening currency and rising inflation, Russia's Central Bank raised interest rates to 21% in October, the highest level in more than two decades. Analysts predict that the rates could rise again in December as the country continues to battle inflation, which is forecasted to reach 8.5% this year—well above the Central Bank's target. Despite the efforts to curb inflation, the ruble’s depreciation is increasing the cost of imported goods, further eroding the purchasing power of ordinary Russians. One result of this inflation has been the rising cost of basic staples, such as the ingredients for borscht, which saw a 20% increase in price compared to 2023.

Russia's Finance Minister Anton Siluanov has suggested that the weak ruble is not necessarily a negative development for the economy, as it benefits exporters by making Russian goods more competitive abroad. However, this comes at a cost to the average citizen, with inflationary pressures continuing to squeeze household budgets. The government’s priority remains its military spending, with nearly a third of the 2024 budget allocated to defense, highlighting the ongoing strain the war is placing on the economy.

Despite the ongoing challenges, Russia's economy has shown a surprising degree of resilience, adapting to the pressures of sanctions and the war. However, the militarization of the economy is beginning to stifle growth in other sectors. According to Russian economists, the only noticeable growth is within industries directly tied to the military, while other parts of the economy show signs of stagnation. This shift toward military spending has raised concerns about the long-term sustainability of the economy and the viability of financing an ongoing war.

Background:

The ruble’s freefall has become a clear indicator of the broader economic struggles faced by Russia as the war in Ukraine continues. While Moscow has made efforts to mitigate the effects of international sanctions, the continued geopolitical tensions and the financial pressures of the conflict are proving difficult to manage, and Russia’s economic future remains uncertain.