On Wednesday, the ruble exchange rate against the dollar fell below the 110 mark for the first time since March 16, 2022, three weeks after the full outbreak of the Russia-Ukraine conflict. The Russian central bank announced on Wednesday that it would stop buying foreign currency to ease financial market pressure.

The central bank stated that it would stop buying foreign currency on the domestic market from November 28 until the end of the year, postponing these purchases until 2025. The regulator said in a statement: “This decision was made to reduce the volatility of the financial markets.” According to Russia's budget rules, the finance ministry sells foreign currency through the National Wealth Fund to cover the gap in oil and gas export revenues or to buy foreign currency when there is a surplus.

Under the strong inflationary pressures brought about by Western sanctions and the Kremlin's impact of massive war spending for nearly three years, the Russian ruble has depreciated nearly 35% since early August. Additionally, as investors shift their savings from stocks to deposits, the Russian stock market has fallen more than 20% this year to date, further exacerbating the depreciation of the Russian currency.

Russian Minister of Economic Development Maxim Reshetnikov stated that the fluctuations in the ruble are due to the strengthening of the dollar and market concerns over the latest sanctions, rather than fundamental factors, and expects the ruble to stabilize soon. He noted that 82% of Russia's exports and 78% of imports are paid in rubles and currencies of 'friendly' non-Western countries. However, analysts predict that by the end of 2024, the ruble exchange rate against the dollar could fall to 115-129.

Although the weak ruble will make Russian exports cheaper, Russians will have to pay higher prices for imported goods, which could exacerbate the already high inflation in the country. Inflation in the country is expected to exceed the central bank's expectations this year, contrary to the goals of monetary tightening policy. The Russian central bank estimates that a 10% depreciation of the ruble will increase inflation by 0.5 percentage points, meaning that the depreciation over the past four months could lead to a 1.5 percentage point increase in inflation.

The Russian finance minister dismissed concerns about the ruble's depreciation, stating that it would be “very beneficial for exports.” The Kremlin also tried to reassure the Russian public, claiming they would not be affected by the sudden collapse of the ruble. Kremlin spokesman Dmitry Peskov shrugged off the ruble's sharp drop of 8.5% on Wednesday, apparently ignoring analysts' concerns about rising import costs and currency 'panic.' He confidently told reporters:

“Russians will not notice the rise in the dollar exchange rate because they are paid in rubles.”

Last week, the U.S. imposed additional sanctions on Russia's third-largest bank, Gazprombank. This has made foreign payments for Russian gas more complicated and increased the difficulty of currency transactions.

In response to the ruble's sharp decline, the Russian central bank has decided to suspend currency trading until 2025. However, traders report that panic is rising in the market. Analysts from BSC Financial Group based in Russia stated:

“In an uncertain environment, the depreciation of the ruble is more like a panic.”

For Putin, a war-driven weak economy is one of the most serious problems he faces. Western sanctions have made goods more expensive, while the focus on military spending has driven wage inflation. The Kremlin has been offering large signing bonuses to men who enlist, while also paying high wages to workers in the arms manufacturing industry.

Analysts attribute part of the ruble's decline to the Russian central bank underestimating the impact of Western sanctions. Dmitry Pianov, first deputy chairman of VTB Foreign Trade Bank, pointed out: “We believe that the share of imported consumer goods in the currency basket is 25%, so this transmission effect is stronger. Our model shows that this effect is five times stronger than the central bank estimates.”

Pianov also stated: “My assumption is that the sanctions against Gazprombank have had a significant impact, as it is no longer a channel for delivering foreign currency to the Moscow Exchange.” He indicated that the central bank should focus on stabilizing the currently dysfunctional currency market in the coming days.

PSB bank analysts believe that the Russian central bank's latest decision will “moderately support the ruble, but it will not be enough to return the exchange rate to last week's levels,” and predict that the market will remain volatile. Some analysts also stated that in response to the ruble's decline, the Russian central bank may raise interest rates from the current 21% (which is already the highest level in at least 20 years) to about 25%.

Article reposted from: Jin Shi Data