Nearly 18 months after launching its full-scale invasion of Ukraine, the Russian government is facing significant economic challenges, with the country’s currency, the ruble, plunging in value on global markets.
On Monday, the ruble’s value accelerated its monthslong decline against benchmark currencies, like the U.S. dollar. With the Russian central bank calling an emergency meeting for Tuesday, the exchange rate was above 100 to the dollar, a roughly 30% decline in value since the beginning of the year.
Russia also revealed that the country’s current account balance, which tracks the relative value of goods and services exported from and imported to the country, had fallen to $5.4 billion in the second quarter of the year, a 93% year-over-year decline. The shrinking number, which suggests a significant decline in exports, is a bad sign for an economy that is largely reliant on the export of commodities such as fossil fuels and grain.
After Russian President Vladimir Putin launched his country’s all-out invasion of Ukraine in February 2022, the country was immediately placed under myriad sanctions by a broad alliance of the world’s largest economies.
The economic sanctions on Russia have only increased over time, especially with the recent imposition of a price cap on Russian oil and gas, which makes it very difficult for Moscow to sell its most lucrative exports on the open market without offering a significant discount to prevailing prices.
In response to both the international sanctions regime and the Kremlin’s need to continue supplying its invading army, Russia has taken steps to significantly reorient its economy toward the support of the war effort. The result has been the transition of significant productive capacity away from commercially lucrative production and toward military hardware and materials.
In an article written for the government-run media organization Tass on Monday, Kremlin presidential aide Maxim Oreshkin acknowledged that the drop in the ruble’s value is a challenge but insisted that the currency’s value will recover quickly.
“The current exchange rate has largely deviated from fundamental levels, though it is expected to normalize in the near future,” Oreshkin wrote. “A weak ruble complicates the economy’s structural transformation and negatively influences real household earnings. A strong ruble is in the interests of the Russian economy," he said.
In the same article, Oreshkin pinned the blame for the ruble’s slide on the Russian central bank, which has been working to stabilize the nation’s economy in the wake of the invasion.
“Soft monetary policy is the main source for the ruble’s weakening and acceleration of inflation. The Central Bank has all necessary tools for normalizing the situation as early as in the near future and lowering lending rates to sustainable levels,” Oreshkin wrote.
For its part, the Bank of Russia, as the country’s central bank is known, has blamed the ruble’s weakness on declining demand for Russia’s exports and an increased demand for the imports that remain available to Russian consumers, a claim supported by the country’s declining current account surplus.
Central bank struggles
The Bank of Russia has had an extremely difficult job in the wake of the invasion, attempting to stabilize the country’s currency and to keep the economy on track.
In the weeks following the invasion, after the value of the ruble began to plummet, the central bank announced a sharp increase in interest rates, which did much to preserve the ruble’s value on the global market.
Russia entered the war with large foreign currency reserves, held in banks around the world, which might have allowed it to purchase rubles on the open market during times of stress, helping to keep its value stable. However, international sanctions blocked Moscow’s access to much of its holdings.
At first, the Russian economy appeared surprisingly resilient in the face of sanctions. At one point in 2022 — even after the beginning of the invasion and the imposition of sanctions — the ruble was among the world’s best-performing currencies.
However, preserving that resilience has been difficult, as Russia has been forced to rely increasingly on China for trade, and to rely on a shadowy network of countries and corporations willing to purchase Western goods and resell them into Russia in violation of international sanctions.
In an emergency meeting on Tuesday morning, the Bank of Russia announced a major increase in the country's benchmark interest rate, raising it from 8.5% to 12%. The currency markets reacted favorably, and the value of the ruble climbed somewhat, from about 102 rubles to the dollar to about 98.