In the early hours of Tuesday, the Russian ruble faced a significant setback, breaching the symbolic threshold of 100 against the U.S. dollar. This depreciation was attributed to ongoing foreign currency outflows and a contracting balance of trade, both exerting substantial pressure on the country’s currency.
A Modest Recovery
However, as the morning progressed, the Russian ruble managed a modest recovery, stabilizing just above 99.5 against the greenback by 8 a.m. London time.
This recent episode echoes a similar occurrence in August when the Russian ruble last weakened into triple digits. Back then, the Bank of Russia swiftly responded by convening an emergency meeting, deciding to raise interest rates by a substantial 350 basis points to 12%. This move was prompted by an op-ed from President Vladimir Putin’s economic advisor, placing blame on the currency’s plunge and the surge in inflation on what was termed a “loose monetary policy.”
The central bank didn’t stop at that; in its September meeting, it raised the key interest rate by an additional percentage point, pushing it to 13%. The rationale behind this move was the persistent inflationary pressure faced by the Russian economy.
In a statement following the meeting, the Bank of Russia explained, “Significant proinflationary risks have crystallized, namely the domestic demand growth outpacing the output expansion capacity and the depreciation of the Russian ruble in the summer months.”
As of September 11, Russian inflation had risen to an annual 5.5%, up from 5.2% in August and 4.3% in July. The central bank pointed out that the pressure intensified due to the pass-through effect of the ruble’s weakening on prices.
While figures from the Kremlin attribute the ruble’s rapid depreciation to loose monetary policy, the central bank emphasizes a sharp decline in the country’s current account surplus. The Bank of Russia’s September report revealed a current account surplus of $25.6 billion for the January to August period, marking an 86% year-on-year decrease from $184.8 billion in the same period of 2022. The trade balance surplus for the corresponding period also plummeted by 68.3%, amounting to $156.7 billion.
The Russian ruble’s journey has been tumultuous since Russia’s invasion of Ukraine in February 2022. After hitting a record low of 120 to the dollar in March 2022, it rebounded to a seven-year high in the subsequent months, thanks to capital control measures by the central bank and a surge in export revenue. However, the recent challenges, including Western sanctions and changes in trade dynamics, have led to a renewed decline, placing additional strain on the currency.