2023-08-14 04:56:11
With the ruble at a 16-month low once morest the U.S. dollar, sparking fears of rising inflation, even one of President Vladimir Putin’s staunchest defenders publicly lashed out at authorities financial institutions over an exchange rate that he says is the subject of global ridicule.
Russia’s central bank took steps Thursday to stabilize the currency, amid the latest wave of financial volatility sparked by Putin’s war on Ukraine. This time around, the challenges are visible both in the weaker ruble that is fueling inflation, but also in government budget deficits that raise concerns regarding Russia’s continued war-intensive spending.
The weaker ruble approached an exchange rate of 100 to the US dollar this week, down regarding 25% since the start of the year. The decline prompted the Bank of Russia on Thursday to halt foreign currency purchases for the rest of the year “to reduce volatility.”
The move should help support the ruble because when the bank spends rubles to buy foreign currency, it increases the supply of rubles in circulation, which lowers their value. The ruble remained roughly stable in Thursday’s trading.
But these trends demonstrate that the evolution of the Russian economy is testing Moscow’s financial policymakers, who have responded nimbly to the shocks of war but still face longer-term dilemmas. Gaping deficits, coupled with increasingly sanctioned exports, have disrupted Russia’s economic balance.
The central bank expects inflation to be between 5% and 6.5% this year. Official data released on Wednesday showed the annual rate of inflation accelerating to 4.3% in July.
“The ruble exchange rate is just an indicator,” said Alexandra Prokopenko, a researcher at the Carnegie Russia Eurasia Center and a former Russian central bank official. “It tells us that the economy is very unbalanced, that it is not working properly – and that something has to be done, because later it will be worse,” she adds.
It is unclear to what extent Thursday’s decision by the Bank of Russia will support the ruble.
Janis Kluge, a researcher specializing in Russian economics at the German Institute for International and Security Affairs, believes that “it helps, but it is not a game-changer. What is more important is the evolution of commodity prices and the evolution of tax expenditures over the next few months”.
Russian mountains
Since Putin’s invasion of Ukraine at the end of February 2022, Russia has been on an economic roller coaster.
A wave of Western sanctions and a spectacular exodus of capital and assets plunged the country into crisis in the followingmath of the invasion. The ruble collapsed from 76 to the dollar a week before the invasion to 135 the following month. The central bank has taken a series of drastic measures, including strictly limiting the outflow of money from the country, in order to avoid a real collapse.
Then the situation changed. Soaring oil prices, due in part to the conflict, helped boost Russia’s export earnings, even as imports declined due to reluctant Russian consumers, withdrawal of foreign companies and other factors. This resulted in a record trade surplus of $221 billion in 2022, up 86% from the previous year. The ruble flip-flopped and soared to its highest level in seven years.
But this year, Russia’s trade surplus has narrowed considerably. Imports have picked up as Russian consumers start buying once more, and the government is pumping billions into the military-industrial complex to finance the war, while many goods still require imported materials.
Oil revenues have been reduced by an embargo and a price cap, while crude prices have fallen from the highs reached last year. Political uncertainty, including an abortive mutiny in June by mercenary tycoon Yevgeny Prigozhin, prompted Russians to transfer money to overseas accounts.
As a result, the ruble has been battered, losing almost half of its value since the highs reached last year.
This is the second time since the start of the war that Russia has been forced to abandon a policy of regularly buying and selling foreign currency, in order to isolate the country’s economy, which depends on energy, fluctuations in the price of oil.
Critiques
Vladimir Solovyov, host of a show on state television and defender of the Kremlin, was angry this week once morest the weakening of the ruble, asking the central bank to explain “why the exchange rate jumps like that, which causes laughter abroad”.
He also addressed the country’s lawmakers: “Haven’t you noticed the exchange rate we have in the country? Have you sent even one request to the central bank? Let these people come and explain to the Russians what is happening! »
The most immediate concern of Russian financial policy makers is the possibility of a significant rise in consumer prices. The central bank reacted to this risk at the end of last month by raising interest rates more than expected, to 8.5%, and further increases might take place.
On his show, Mr Solovyov warned that the rate of inflation might peak during Mr Putin’s re-election campaign, ahead of the vote scheduled for next March.
Some analysts, including Chris Weafer, managing director of Eurasia Macro-Advisory, believe Russian financial authorities are deliberately letting the ruble weaken.
“The ruble’s weakness reflects the government’s concern regarding the level of budget revenue – and there aren’t many areas where they can cut the budget without impacting the military or the social stability that the government has. we are currently observing in Russia, analyzes Mr. Weafer. The lesser of two evils is therefore to let the ruble weaken. »
But others do not believe that Russia exercises such control.
“I don’t think the Russian Finance Ministry wants to weaken the rouble, despite the positive effect on short-term earnings,” Kluge said. Inflation also increases spending. For example, pensions will have to be increased accordingly, even if with some delay. »
This article was originally published in the New York Times.
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