The ruble tumbled on Wednesday to its lowest level in over two years, as a mix of low oil prices, new sanctions against Russian businesses and burgeoning government spending on its war effort put ever-greater strain on the Russian economy.
The central bank reacted by suspending currency purchases for the rest of this year. That will restrict the supply of rubles and should support the exchange rate accordingly. It took a similar step last year, after the mutiny of mercenary leader Yevgeny Prigozhin triggered another crisis of confidence.
As such, the measure will help to keep a lid on a growing inflation problem, which has forced the central bank to raise its key interest rate to 21 percent. Official data show inflation running at 8.5 percent, but private surveys such as those by market research firm ROMIR suggest that the actual rate is much higher.
The ruble has been under steady pressure all summer, as the price of oil — Russia’s most important export, despite Western sanctions — has fallen due to weak Chinese and European demand and rapidly growing supply from the U.S., Brazil and Guyana. Brent crude prices have fallen nearly 4 percent this week alone on relief at the ceasefire agreed to by Israel and Hezbollah.
That pressure intensified after the U.S. imposed a new round of sanctions on Gazprombank, which until then had been allowed to process payments for what remains of Russia’s gas export business to Europe. The new package also targeted 50 internationally connected Russian banks, more than 40 Russian securities registrars, and 15 Russian finance officials.
“The sanctions packages imposed are having their negative effects, felt by Russians mainly in the form of high inflation,” said Grzegorz Drozdz, market analyst at Conotoxia.
The ruble fell as far as 114.75 to the U.S. dollar, according to data from Investing.com, a level unseen since March 2022, just after Russia started its war in Ukraine. By late trading in Moscow it had recovered to 113.15, a drop of over 7 percent on the day.
Angry oligarchs
The central bank’s tight monetary policy has drawn increasing criticism from the country’s leading industrialists, such as metals baron Oleg Deripaska and Sergey Chemezov, the influential head of defense conglomerate Rostech. Chemezov’s organization is responsible for making much of the equipment needed to fight the war in Ukraine.
“It’s as if the medicine is more harmful than the disease,” Severstal chairman Alexey Mordashov was quoted by RBC as telling a conference in St. Petersburg on Wednesday.
“We need serious discussions on this topic,” Mordashov said. “This is a situation probably without precedent in modern world history, when the central bank rate is 2.5 times higher than inflation, and it still doesn’t slow down.”
The CBR raised interest rates to 21 percent at its last meeting, and Governor Elvira Nabiullina threatened another increase at its next meeting. So far this year the bank has raised its policy rate by 500 basis points, but has been unable to stop the ruble losing nearly a quarter of its value against the dollar.
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