Russia’s currency has continued to plunge, adding to the country’s economic turbulence and raising questions about the financial sustainability of Vladimir Putin‘s aggression in Ukraine.
Russia’s Central Bank (CBR) intervened on Wednesday to prop up the plummeting ruble, which weakened to 114 against the U.S. dollar, its lowest since March 2022 during the first weeks of Putin’s full-scale invasion.
The CBR said it would halt foreign purchases on the domestic currency market for the rest of the year “to reduce the volatility of financial markets.” The currency had rallied to 110 against the greenback by Thursday.
Newsweek has contacted the Russian finance ministry for comment.
The ruble’s collapse follows new U.S. sanctions against Russia’s Gazprombank which had previously been spared American punishment due to its role as a conduit for Russian gas payments. Losing this channel could cause a further decrease in revenues from gas, already the export hit hardest by sanctions.
“Russia is already under pressure to maintain extremely high levels of military expenditure, and the devaluation of the ruble may potentially further strain its capacity to continue financing its war in Ukraine,” Patrick McGovern, an associate at geopolitical and cyber risk consultancy S-RM told Newsweek.
But the most significant impact “may be the need to redirect other federal budget resources to continue financing the war, which may lead to a degradation in public services and create the conditions for social disquiet in the long term,” he added.
The weaker currency is unlikely to have a negative impact on Russia’s military industrial complex producing arms immediately, said Vasily Astrov, an expert on the Russian economy with the Vienna Institute for International Economic Studies.
“Imports of critical goods [such as] circuits, microchips, for military purposes will become more expensive, he told Newsweek. However, they will continue regardless of the exchange rate and the state can afford that due to higher budget revenues from oil and other commodity exports traded in dollars.
“But overall inflation will rise further, and this will eat into the real incomes of the population, so that private consumption—the main driver of economic growth—will suffer somewhat as a result,” Astrov said.
The targeting of Gazprombank means Russian gas and oil purchasers will need other ways to make payments, which could take time. So, even if Russian budget revenues from oil and other commodity exports traded in dollars go up, Astrov said, “this is all assuming that the problems with Gazprombank are solved.”
High inflation
In a rare statement about the exchange rate, Russia’s finance minister Anton Siluanov lauded the weak currency as a boon for exporters, while Kremlin spokesman Dmitry Peskov also played down its significance saying, Russians “won’t notice” the dollar exchange rate “because they are paid in rubles.”
However, the diminishing strength of the money being thrown at Russian recruits to entice them to fight Putin’s war has agitated pro-Moscow military bloggers. The weak currency is a “powerful blow to all industries, including the one producing the tools of war,” wrote Zhivov Z.
These high payments to attract troops have added to Russia’s ballooning military costs which this year will eat up nearly a third of the government budget and go even higher, according to Reuters.
Meanwhile, a worker shortage has stoked inflation to 8.5 percent—more than twice the target of the CRB, which in response has raised the key interest rate to a record 21 percent, and the bank’s governor, Elvira Nabiullina, has suggested it could go even higher.
While adding a further burden to businesses by raising the costs of new and variable-rate loans, public disquiet over the soaring costs of staple goods like butter and potatoes could pose a problem for Putin as the war stretches on.
“Russians will be poorer and ultimately the risk there is social and political pressures building against Putin,” Timothy Ash, emerging markets strategist at BlueBay Asset Management told Newsweek. “It adds complexities to Putin’s decision set.”
“The fact Putin is having to use North Korean troops in Kursk underscores the increasing social, economic and military constraints on Putin,” Ash added.
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