Price fall: What is now speaking against the ruble

The Russian central bank is trying to combat the falling ruble by raising interest rates. But she may have had little success with it. Why the ruble will be difficult in the future.

How bad is the fall in the ruble?

The Russian currency has been under pressure since the beginning of the year. Recently, the rate of decline of the ruble has accelerated, experts are talking about a real “collapse”. Within a year, the Russian currency had depreciated 40 percent against the dollar.

Against the euro, the fall in the exchange rate is even greater at 45 percent. Earlier in the week, the ruble hit its lowest level since Russia’s war of aggression against Ukraine began in March 2023. In some cases, one had to pay more than 100 rubles to a dollar and more than 110 rubles to a euro.

What caused the sharp fall in the ruble?

A plausible explanation for this is primarily Russia’s worsening trade balance. Russian exports have fallen sharply – behind this has been falling revenues from oil and natural gas sales abroad. At the same time, imports, which fell after Russia invaded Ukraine, rebounded.

The logical consequence: the Russian trade surplus (exports minus imports) has fallen significantly, depreciating the ruble exchange rate. The Russian central bank expects the trade surplus to shrink by nearly 70 percent this year from a year earlier.

What role do Western sanctions play in this?

Russian exports have fallen mainly due to falling energy prices, a freeze on Russian gas sales to Europe and a Western boycott of Russian oil. A Russian oil price cap of $60 per barrel also contributed – although Russia was able to partially circumvent this price cap by exploiting the loophole of overestimated transport costs. India and China in particular showed great interest in buying Russian oil.

Are there other reasons for the ruble’s weakness?

Experts suspect that, in addition to the poor trade balance, increased capital flight from Russia is also to blame. The Russian central bank only extended capital controls – originally introduced in 2022 to stabilize the foreign exchange market – in the spring.

But capital controls are increasingly said to be flawed. More and more wealthy Russians can bring their money abroad. “The incentive to withdraw capital from Russia should be huge,” Commerzbank expert Tata Gose insists.

What is the Russian central bank doing to stop the fall of the ruble?

The Russian Central Bank (CBR) reacted to the fall in the ruble’s value with an extraordinary interest rate meeting, in which it sharply raised the key interest rate from 8.5 to 12.0 percent. The central bank explained that the decision was taken to “minimize risks to price stability” and did not explicitly rule out further interest rate hikes.

What does central bank interest rate hike mean?

The reality is that a weaker ruble has the potential to further fuel inflation. In this sense, the central bank’s reaction is understandable. But it is also true that a prime interest rate of 8.5 percent was already too high for an inflation rate of 4.3 percent. This corresponded to a positive real interest rate – that is, the nominal interest rate minus inflation – of 4.2 percent.

After yesterday’s interest rate hike, the real interest rate now stands at 7.7 percent. By comparison: In the euro zone, real interest rates were recently minus 1.1 percent. In other words, the ruble’s problem is certainly not domestic interest rates — they were high enough before the recent rate hike.

Why did the central bank raise interest rates in the first place?

Monetary experts such as Ulrich Leuchtmann of Commerzbank believe the central bank is primarily reacting to political pressure. When the dollar crossed 100 rubles on Monday, the government had apparently reached a limit. The Kremlin’s economic adviser publicly criticized the ruble’s fall.

However, the fact that the Russian central bank is reacting to political pressure is a significant change, as it has been a haven of economic-political reason and independence since the inauguration of central bank chief Elvira Nabiullina. That seems to be over now.

What are the future prospects for the ruble now?

The ruble benefited slightly from an increase in key interest rates. However, by mid-week, it was still below the $100 mark. Market watchers and economists were not surprised. They expect the Russian currency to remain weak for a long time, as interest rate hikes will not remove the real causes of the ruble’s decline.

For example, Chris Weifer of Macro Advisory Partners expects a price of around 95 rubles to the dollar in the coming months – roughly where the government wants to see the ruble. According to Ekaterina Zolotova, a Russia analyst at US think tank Geopolitical Futures, the government is aiming for an exchange rate of 80 to 90 rubles to the US dollar.