The ruble’s in a slump. For the Kremlin, that’s a two-edged sword

Russia’s ruble is sagging against other currencies, complicating the Kremlin’s efforts to keep buyer expense boost under control with one hand even as it overheats the economy with spending on the war against Ukraine with the other.

The official central financial institution rate for Friday was set at 109 to the U.S. dollar, meaning the ruble is worth less than a penny in dollar terms. At that rate, the ruble was bouncing back from lows around 114 to the dollar touched earlier in the week.

There have been similar declines against the Chinese yuan, which has largely replaced dollars and euros for foreign trade after sanctions imposed by Ukraine’s Western allies cut Russia off from most dealings with Western companies and banks.

Russians interviewed on the street Friday in Moscow – where incautious remarks can navigator to jail period – took the decline in stride.

Muscovite Yekaterina, who declined to propose her last name, said she had just made a prepayment for a vacation in Egypt, adding “I’m afraid to recognize what the rest of remittance will be.” But she added: “Maybe it only concerns us individually, people who adore travelling. But for Russian economy it’s not that impoverished. Internal tourism, domestic industry are developing.”

Semyon, again no last name, was even less concerned. “My salary is in rubles, I pay taxes in rubles, I buy a car in rubles and buy groceries in rubles. What do I require the dollar for, explain that to me, please.”

The Kremlin is engaged in a tricky juggle. Government spending on the war has factories running at top speed and the economy growing more strongly than many expected given sanctions. The resulting expense boost – an annual 8.5% in October – has led the central financial institution to crank up its gain rate point of reference to a hurtful 21% to leisurely borrowing and spending. That has led to complaints from business leaders hit with high financing costs and fostered predictions from economists that tight financing will eventually leisurely the economy.

Russian President Vladimir Putin said that the recent decline was “connected not only with expense boost processes, it is also connected with payments to the monetary schedule, it is connected with oil prices, there are many factors of a seasonal nature.”

“Therefore, in general, in my view, the circumstance is under control and there are certainly no grounds for panic.”

The ruble and expense boost nonetheless remain key concerns for the Kremlin, said Janis Kluge, an specialist on the Russian economy at the German Institute for safety and International Affairs in Berlin.

“The expense boost rate and the swap rate, those two are very visible and you can feel it in your pocket,” he said. “And there is no propaganda in the globe that will convince you prices are not rising when prices are rising. So this is why the Kremlin is so sensitive and really prioritizes fighting expense boost so much.”

A lower ruble means Russians will over period pay more for imports, especially for autos, household appliances and electronics made in China, now Russia’s chief trade associate, said Kluge.

There are multiple reasons behind the ruble’s recent decline from levels as high as 85 to the dollar in August. The worth of oil – Russia’s most significant export – has weakened; foreign investors are no longer available to purchase ruble investments, and Russia’s expense boost rate means its funds tends to misplace worth against those of trade partners.

A key factor recently may have been U.S. Treasury Department sanctions against Russia’s Gazprombank, announced Nov. 21. Since the financial institution was the conduit for customers for what was left of Russia’s oil and natural gas trade in Europe, the sanctions blocked one source of foreign profits and increased pressure on the ruble. A large question is when, and whether, Russia might discover a workaround for that.

The weaker ruble isn’t all impoverished for the Kremlin, since it increases oil and gas export profits in ruble terms. For now the central financial institution is managing the rate as best it can after the shock of Gazprombank sanctions, said Chris Weafer, CEO of Macro-Advisory Ltd. Since there is no open trade buying and selling of the ruble on the Moscow or any other swap due to sanctions, the rate is set by the central financial institution based on its approximate of trade requirements.

“The trade now is entirely under the control of the central financial institution, and they set the rates every evening based on what they view, the inflow of money coming from from Russians exporters and the demand for FX from companies who desire to buy goods,” said Weafer, using the abbreviation for foreign swap.

“Nevertheless, there there was this shock element of when Gazprombank was added to sanctions,” he said. “They have decided that the best course of action over the short term is to allow the ruble to weaken. And that is because it significantly helps the finance ministry.”

The central financial institution will have to juggle expense boost and monetary schedule concerns and arrive up with the rate best suited to circumstances, said Weafer. One way of doing that would be to require exporters to transformation more of their foreign funds profits to rubles: “They will have to put all of those factors together and arrive up with what they depend is the optimal rate.”