MOSCOW, RUSSIA – JUNE 29: (RUSSIA OUT) Russian President, Vladimir Putin talks during The Strong Ideas For The New Times Forum, on June 29, 2023 in Moscow, Russia. President Putin visited the annual forum, hosted by the Agency for Strategic Initiatives (ASI). (Photo by Contributor/Getty Images)
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The value of the Russian ruble falls and falls. For the first time since March 2022, a ruble currently costs more than 100 euros.
In addition to the revolt by Wagner boss Prigozhin, the fall in the share price is mainly due to economic reasons. Russia’s export earnings are falling, while import spending is growing. That has a lot to do with the sanctions.
For President Vladimir Putin, the price slide is a threatening signal. Because many imports are becoming more expensive, inflation is likely to rise first, followed by interest rates. Russia’s economy is weakened.
The Russian ruble continues to depreciate significantly. At the end of the week, a ruble cost more than 100 euros for the first time in a long time. The ruble also lost significantly against the US dollar and cost over $91. Russia’s currency has lost around 20 percent against the euro and dollar this year. The ruble is back down from before Russia attacked Ukraine and is at its lowest since March 2022.
The failed uprising of the head of the Wagner mercenaries, Yevgeny Prigozhin, is often cited as the reason for the fall in the share price. Indeed, by the end of June, the outflow of capital from Russia had increased significantly. Many Russians stocked up on other currencies, including US dollars or euros when they could. Demand for flights abroad had also risen sharply.
But the causes of the decline in the ruble lie deeper and are economic. They are mainly due to shifts in Russian trade – and are closely related to the Western sanctions against Russia.
That is why the ruble initially rose in the summer of 2022
The course of the ruble since the beginning of the war makes this clear. The share price plummeted immediately after Russia invaded Ukraine. A sharp rise then followed, which surprised many. But the rise in the ruble also had something to do with the sanctions. Russia’s export earnings increased because energy prices rose sharply and Russia was still exporting raw materials largely without restrictions. In contrast, the sanctions for exports to Russia took effect more quickly. So Russia was able to buy fewer goods and spent fewer rubles. The surplus in foreign trade increased sharply. This also drove the exchange rate of the ruble.
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The ruble peaked in the summer of 2022. But then Russia’s energy export revenues began to decline. On the one hand, more sanctions from Western countries, which for example refrained from oil and coal from Russia, took effect. On the other hand, Russia itself restricted its gas supplies – including to Germany. Instead, Russia sold more oil and other goods to countries like China, India and Turkey. In return, the state-owned companies had to accept lower prices. Revenue from exports fell.
At the same time, Russia’s imports rose again. On the one hand, Russia bought more products, also from China or via Turkey. On the other hand, more goods subject to sanctions from Western countries found their way to Russia via detours. So the country is again spending more rubles on imports.
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In 2022, Russia’s foreign trade surplus had risen to a record $332 billion. But the trade surplus has been falling for some time – by 80 percent, according to the head of the Russian central bank, Elvira Nabiullina. This is the main reason for the declining exchange rate of the ruble, said Nabiullina. Viennese economist and Russia expert Valisy Astrov agrees: “Since the beginning of the invasion, exchange rate dynamics have been primarily determined by the current account,” he told the “Handelsblatt”.
What are the consequences of the weak ruble?
Many people in Russia will hardly be directly affected by the weaker ruble. They have not been able to buy imported consumer goods from the West for a long time anyway. Traveling abroad is hardly possible for most people in Russia, especially in the euro or dollar area.
However, the weaker ruble has far-reaching consequences for the economy as a whole. It makes Russia’s imports more expensive. Economists therefore expect inflation to pick up in Russia. “Inflation is likely to rise due to the weaker ruble,” said Astrov, the “Handelsblatt”. In response, the central bank is likely to raise interest rates in Russia soon. They have been at 7.5 percent since September. He expects “almost 100 percent” a rate hike on July 21.
This would also tend to support the ruble because the interest rate differential to other currency areas is narrowing. The strong interest rate hikes by the central banks in the USA and the euro zone put the currencies of many emerging countries and Russia under additional pressure.
The higher costs for imports and debt service are also putting additional pressure on the treasury of Russian President Vladimir Putin. Its state budget closed the first half of the year with a deficit of 2.6 trillion rubles, or about 26 billion euros. For the state, too, the gap is widening from rising costs of war and lower revenues from energy exports.
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What’s next for the ruble
Irrespective of further political turmoil or unforeseen developments in the Ukraine war, economists expect the movements of the ruble to calm down. “Russia still exports more than it imports, but not to the same extent as before,” says Aksoy. On the other hand, he would not overestimate the role played by the Prigozhin revolt.
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