Russia in panic as US sanctions trigger ruble collapse

The Russian ruble has plunged to its lowest level against the dollar since the immediate aftermath of the full-scale invasion of Ukraine in March 2022.

The ruble hit 113 against the US dollar on Thursday. On Wednesday, Russia's central bank announced it would stop foreign-currency purchases to try and strengthen the currency and ease pressures on financial markets.

What's behind the currency plunge?

The ruble has been sliding since late summer, falling by more than a third since August. Oil prices have fallen in the same period, hitting Russia's earning capacity from its most important commodity.

That has piled pressure onto a war economy already struggling under the weight of soaring inflation. President Vladimir Putin has dramatically ramped up military spending over the past 18 months, in an attempt to gain the upper hand in the war in Ukraine.

Defense spending has more than tripled since 2021 and is set to be a record 13.5 trillion ruble ($122 billion, €102 billion) in next year's budget, another huge 25% hike. The country's central bank estimates inflation hit 8.5% this year, double its target. Interest rates are also at record highs, hitting 21% in October.

However, the sharp ruble plunge of recent days is linked to sanctions placed by the US on Gazprombank on November 21. Gazprombank was one of the few major Russian banks not previously hit by sanctions and had become the key platform for Russian energy payments and its main gateway to the global finance system. Banning Gazprombank from the US-dominated global financial system limits the Kremlin's capacity to fund its military and also makes it harder to receive revenues for its commodities, including gas, from its remaining European customers such as Slovakia and Hungary.

The United States has also moved to discourage foreign banks from doing business with Russia, warning them that they could face secondary sanctions if they signed up to Russia's so-called System for Transfer of Financial Messages (SPFS), the Kremlin alternative to the Western-dominated SWIFT system.

Chris Weafer, an investment adviser who has worked in Russia for more than 25 years, thinks the sanctions on Gazprombank could have "severe consequences" for the budget, "if workarounds are not found or waivers are not granted by the US" to some countries. "The Russian central bank is scrambling to find a way to deal with it. The evidence suggests it is still looking for a solution," he told DW.

Oleg Buklemishev, a Moscow-based economist, told video podcast DW Novosti Show that the latest developments are a reflection of the various pressures the Russian economy has faced since the invasion.

"The country, suffering and shifting exports and imports from one direction to another, bears colossal costs in logistics and sales," he said. "It is all insanely expensive. And at the same time, I would say that it is naive to expect that you and your currency will strengthen." 

What does it say about the state of the Russian economy?

Since Russia dramatically began ramping up defense spending, experts have warned of the dangers of its war economy overheating. While the country has experienced strong GDP growth and record-low unemployment as a result of the spending splurge, inflationary pressures have mounted.

Russia published new data this week which underlined some of the problems. Amid serious labor shortages due to workers being sent to fight in Ukraine and the fact that over 1 million highly-skilled workers left Russia due to the war, real wages increased 8.4% year-on-year in September.

The rise in incomes and spending has seen prices of important consumer items such as butter increase so much that theft has become common. In many shops, butter is now being sold in padlocked boxes.

What has the government said?

The central bank said its decision to stop foreign currency purchases "was made to reduce the volatility of financial markets."

Economy Minister Maxim Reshetnikov said the ruble's volatility was due to the strength of the US dollar and market concerns following the sanctions against Gazprombank. They were not the result of "fundamental factors," he told Russian news agency Interfax, adding the situation would "soon stabilize."

There are suggestions that a weak ruble will suit Putin's massive spending plans. A weak ruble means the Kremlin may have more domestic currency to spend, as its oil and gas exports are typically purchased in foreign currencies. 

Russian Finance Minister Anton Siluanov hinted at as much earlier this week. "I'm not saying whether the rate is good or bad. I'm just saying that today the exchange rate is very, very conducive to exports," he was quoted by state news agencies.

Weafer said the government sees the slide of the ruble as a chance to convert foreign currency earnings into as many rubles as possible ahead of the huge budget increase in 2025.

"It wants to keep the budget deficit low," he said, adding that he also thinks they may see advantages in terms of making their exports, such as fertilizers, cheaper for prospective buyers.

How is it likely to go from here?

Russia's economy has defied dire predictions before. When the US, EU and UK leveled sanctions on Moscow in early 2022, leaders claimed it would cripple the country's economy.

However, its huge reserves of oil and gas provided it with massive revenues throughout 2022, while its ability to evade sanctions meant it was able to keep revenues healthy for much of 2023.

Although it took time to find ways to beat sanctions, it has consistently been able to do so and may be able to do the same despite the latest Gazprombank sanctions. It has also deepened trade relationships with China, India and othersas European countries have largely turned away from its oil and gas.

However, there are reasons for Moscow to be worried. The falling price of oil has hit its most important source of revenue. Meanwhile, experts say the latest data suggests the economy is overheating to a level that is dangerous for financial stability. That puts significant pressure on the Kremlin to get the situation under control as soon as possible.  

Weafer said the weak ruble will make the battle against inflation more difficult for authorities to manage. However, he cautions that every time the ruble has previously slid, the government has eventually stepped in to correct the rate. "We may see it again before year-end," he said.