Russia plays roulette with the rouble

Moscow’s central bank will hold an emergency meeting on Tuesday after the Russian rouble tumbled to its lowest level since the early weeks of President Putin’s full-scale invasion of Ukraine.

The exchange rate of Russia’s currency has weakened to the point where you would need over 100 roubles to get a single dollar back – compared to about 60 roubles a year ago.

The Kremlin was quick to pin the blame on Russia’s central bank. Maxim Oreshkin, a Kremlin economic adviser, insisted that the source of the problem is “soft monetary policy.”

The Bank of Russia – which dramatically hiked raised interest rates from 9.5 to 20 per cent after war broke out but has since cut them right down to 7.5 per cent – “has all the tools to normalise the situation in the near future,” Oreshkin added. 

This is not the first time since the war started that the rouble has taken a hammering. In the early days of Putin’s invasion, it was trading briefing at 126 to the dollar. But it made an impressively swift recovery, aided by the bank’s steep interest rate rises, the government’s move to limit transfers of money abroad and, of course, soaring energy prices. 

Yet things have deteriorated again in recent months – with the rouble losing about 25 per cent of its value this year. 

This is largely because so little currency is coming into the country, despite imports recovering to pre-war levels. 

According to official figures published last week, Russia’s current account surplus — roughly the difference between exports and imports — fell by 85 per cent in the first seven months of this year compared with the same period in 2022. 

Revenues from oil and gas – Moscow’s main exports – have fallen by over 40 per cent this year, thanks to a G7-imposed price cap on Russian crude oil and European countries’ efforts to wean themselves off Russian energy. 

Another big factor driving the rouble’s plunge is Moscow’s huge spike in military spending. This, alongside financial compensation for bereaved families of soldiers killed in Ukraine, has boosted the domestic economy but it has added to Russia’s growing budget deficit, pushing the currency lower.

As the fighting rumbles on – with new reports of Russian strikes in the southern city of Odesa and gains by Kyiv’s troops in the eastern city of Bakhmut – the steep cost of war appears unlikely to to let up any time soon. 

So what can Moscow do to prop up its ailing currency?

Russian central bankers will almost certainly respond to political pressure to increase rates. JP Morgan is now predicting they will increase the bank rate to 10 per cent by the end of this year, compared to its previous forecast of 9 per cent.

The Bank of Russia is also stopping foreign currency purchases on the domestic market until the end of the year. 

Such measures could prove helpful. But these alone are unlikely to solve the economic woes of what is now the world’s most sanctioned country. 

The Kremlin’s decision to single out soft monetary policy as the source of the rouble’s tumble is perhaps not that surprising. It suggests Putin prefers to blame his own central bankers rather than admit that Western sanctions are biting – or that the cost of a war he thought would long be over is piling up. 

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