Military spending is rising, the ruble is falling. Russian President Vladimir Putin and Defense Minister Shoigu. Photo by Contributor/Getty Images
After brief consolidation, the Russian ruble has slipped sharply again.
At the beginning of the week, Russia’s currency fell to its lowest level since March 2022 against the US dollar and the euro.
In addition to the economic sanctions, the ruble is particularly affected by the lower oil price. At the same time, President Vladimir Putin doubled the war budget.
The ruble is rolling again, but only down. After a breather, Russia’s currency has tumbled again. At the beginning of the week, the ruble slipped against the US dollar and the euro to its lowest level since March 2022. One euro costs well over 105 rubles. More than 96 rubles had to be paid for one US dollar.
Within a year, the euro has appreciated by around 70 percent against the ruble. The US dollar has appreciated by almost 60 percent against the ruble. There is currently no end in sight to the price decline.
The currency of the Russian war economy has been under pressure for a long time. In early summer, after the uprising of the head of the Wagner mercenary unit, Yevgeny Prigozhin, the decline had accelerated. After a brief lull, the decay continues.
Falling oil prices and drone strikes in Moscow
Observers cited the falling oil price on the world market as the most important reason. Brent crude, the benchmark for Russia’s oil exports, fell to $83 a barrel at the start of the week. At the beginning of August it was still above $86. The weaker world economy has at least stopped the previous rise in oil prices for the moment.
Russia relies heavily on its oil exports. After the Western sanctions, Russia sells more oil to other countries such as China or India, but has to accept deductions from the world market price anyway.
Increased drone attacks on targets in Russia’s capital Moscow are also cited as reasons for uncertainty. Last week, a high-rise building in Moscow’s business district, which also houses the offices of Russian ministries, was damaged by drones. Uncertainty and the Prigozhin uprising have repeatedly led to Russians trying to get money abroad.
Russia is countering this with capital controls and trying to strengthen its currency by only trading its commodities in rubles. Apparently this course doesn’t work either.
However, the reasons for the decline in the ruble are primarily economic and based on shifts in Russian foreign trade. These are closely related to Western sanctions against Russia.
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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 ruble plummeted immediately after Russia invaded Ukraine in February 2022. This was followed by a sharp rise (see chart). This short high also had to do with the sanctions. Russia’s export earnings increased sharply because energy prices rose significantly at the time and Russia initially exported 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. Then Russia’s energy revenues began to decline. On the one hand, sanctions by Western countries against oil and coal from Russia took effect. In addition, Russia itself restricted its gas supplies – including to Germany. True, Russia sold more oil and China, India or Turkey. In return, the state-owned companies had to accept lower prices. Revenue from exports fell.
At the same time, Russia’s imports increased again. Russia also bought more products from China or via Turkey. On the other hand, sanctioned goods from Western countries found their way to Russia via detours. So the country is again spending more rubles on imports.
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Due to the turmoil in the energy markets, Russia’s foreign trade surplus had even risen to a record $332 billion in 2022. However, the trade surplus has been declining 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.
Central bank’s sharp hike in interest rates fizzled out
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. As a result, inflation in Russia is already picking up. From April to June inflation rose from 2.3 to 3.2 percent. In response to the fall in the ruble and rising prices, Russia’s central bank unexpectedly increased its key interest rate by one percentage point to 8.5 percent at the end of July. Central bank chief Nabiullina indicated further rate hikes. So far, it has not been able to noticeably slow the decline of the ruble.
Instead, the higher costs of servicing the debt are putting additional pressure on the coffers 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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Russia doubles its spending on the war
At the same time, Putin doubled spending on the war. The Russian military’s budget for this year is more than $100 billion – twice as much as originally planned. This emerges from government documents reported by the Reuters news agency.
In the first half of the year, Russia spent 12 percent more than the $54 billion (4.98 trillion rubles) planned for the year as a whole.
Featuring footage from Business Insider Poland.
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