Russia tries to contain the panic over the falling ruble, the central bank intervenes

Russian authorities are trying to contain panic over the ruble’s sharp fall this week, as the central bank was forced to intervene to support the currency on Wednesday.

The ruble weakened to 114 against the greenback on Wednesday, hitting its lowest level since March 2022, shortly after Russia invaded Ukraine.

Russia’s Central Bank (CBR) was forced to intervene that day to support the ruble, saying it would halt foreign purchases in the domestic foreign exchange market for the rest of the year “to reduce volatility in financial markets.”

Following the intervention, the ruble was trading at 110 against the dollar on Thursday morning.

According to a Russian media report translated by Google, Kremlin spokesman Dmitry Peskov was dismissive of the cut on Wednesday, telling a reporter that ordinary Russians would not be affected because they receive their salaries in rubles.

Close followers of Russian geopolitics and macroeconomics say the weakening ruble portends a rapidly deteriorating economic situation for Moscow.

Timothy Ash, emerging market strategist at BlueBay Asset Management, described the ruble as “in free fall” and said there appeared to be “a real currency crisis in the making in Russia.”

“A weaker ruble means higher inflation, higher CBR policy rates in response and lower real GDP growth,” Ash said in emailed comments.

The ruble’s plunge was blamed in part on a series of new U.S. sanctions against Russia’s Gazprombank announced by the White House last week, as well as the war-oriented domestic economy that sent inflation soaring.

The central bank has already raised interest rates to 21%, but this has so far failed to curb rapid price increases. The inflation rate was 8.5% in October, while prices for staples such as butter and potatoes have skyrocketed over the past year.

The government has blamed the high cost of living on sanctions imposed on Russia by “unfriendly” countries to distract from its war on Ukraine. The conflict has now led to labor and supply shortages and driven up wage and production costs.

Despite rising price pressures amid massive increases in defense spending and increased domestic arms production, Russian President Vladimir Putin has denied trading “butter for weapons”.

The Russian economy still managed to grow during the war, largely thanks to Russian oil and gas exports to a handful of countries willing to turn a blind eye to the conflict. The International Monetary Fund has revised its GDP forecast for Russia upwards in its fall economic outlook and now predicts growth of 3.6% in 2024.

Still, the company noted an economic slowdown, forecasting growth of 1.3% in 2025 and noting that this reflected “a sharp slowdown… as private consumption and investment slowed amid lower labor market tightness and slower wage growth.” to subside.”

The ruble devaluation comes as the Biden administration makes final attempts to weaken the rubleile Pressure on the Kremlin ahead of President-elect Donald Trump’s inauguration in January.

The recent sanctions against Russia’s third-largest bank Gazprombank are considered particularly painful for Russia as they prevent the financial institution from processing energy-related transactions involving the US financial system. The U.S. Treasury Department also accused the bank of serving as an intermediary for Russia to purchase military materials for its war effort against Ukraine and to pay Russian soldiers.

The White House had previously shied away from sanctioning the bank because it also accepts payments from European buyers of Russian natural gas – but most of those consumers have tried to sharply reduce their Russian gas purchases since the start of the war.

“For several months we have been seeing tougher sanctions – sanctions against (the Moscow Stock Exchange) MOEX, OFAC (the US Office of Foreign Assets Control), secondary sanctions and now sanctions against Gazprombank. This is the result.” “It is becoming increasingly difficult for Russia to conduct foreign trade,” noted Ash of BlueBay Asset Management.

Economists say there is no doubt that the war and Western measures to punish Russia for its invasion are starting to have an impact.

“You might think two years of sanctions are starting to have a devastating impact on the Russian economy,” Joseph Brusuelas, chief economist at RSM US, commented on Wednesday as the ruble continued to fall.

Russia’s economy appears to be “an overheated economy that is struggling to support its war effort (and is depleting its resources”), he said in comments on an apparent endgame in which it stops buying foreign currency, which began today. “

“The central bank has suspended foreign currency purchases until the end of the year to curb volatility in financial markets. The ruble has fallen 35% since August as inflation ravages the domestic economy (and) as the Kremlin makes a fateful decision.” “Guns vs. butter,” he said, urging observers to “watch this space for signs of greater economic… Problems are being observed as inflation skyrockets and black market prices paint a very different picture of a war economy the world is on the brink of collapse.

Russian officials quickly downplayed the ruble’s drastic weakening and did so once in turn blame sanctions for the decline.

On Wednesday, Maxim Reshetnikov, head of Russia’s Ministry of Economic Development, told reporters that the dynamics of the ruble exchange rate is not determined by “fundamental factors.”

“The current weakening of the exchange rate is not related to fundamental factors, we see that the trade balance is strong,” he said, according to Google-translated comments reported by Russian news agency Interfax.

“The main factors of the weakening are the strengthening of the dollar against world currencies and … the background of a further tightening of sanctions against the Russian Federation,” he told reporters in Astana. “In addition, as is often the case in such situations, there is currently an excessive emotional component in the foreign exchange market. Experience shows that the price always stabilizes after a period of increased volatility.”