The Russian currency has continued its downward decline, reaching 95 rubles per dollar and 105 rubles per euro this week. This drop is more than just a psychological blow for Russians; it is worsening inflation and causing severe economic issues. The ruble’s depreciation is being driven by a combination of reasons, including high budget spending, increased domestic demand, and a labor shortage. To relieve the ruble’s strain, the government has taken the unusual step of deviating from a core financial principle: using windfall oil earnings for immediate spending.
The Ruble’s Ongoing Descent
Since December 20, 2022, the ruble has been steadily declining. While it has seen intermittent episodes of turmoil, developments last week caused another bout of volatility. The dollar and the euro both gained five rubles in value over five trading sessions on the Moscow Exchange, hitting 95.6 and 105.6, respectively. These values are the highest since late March 2022, during a period of extreme wartime uncertainty.
Economic Struggles Amplified by Falling Ruble
For Russians, the falling ruble is more than just a numerical shift; it has real-world effects. The devaluation exacerbates inflation, which was already on the rise due to a mix of variables such as higher fiscal spending, rising domestic demand, and a labor shortage. These obstacles, taken together, create an economic context in which the ruble’s decline is more than simply a statistical concern, but an actual crisis.
Budgetary Principles Under Pressure
In an effort to counteract the ruble’s decline, the government has made a surprising departure from a central budgetary tenet: diverting windfall profits from oil for immediate fiscal needs. This change marks a noteworthy shift in policy, signaling the gravity of the situation and the government’s commitment to address the challenges posed by the ruble’s decline.
Foreign Trade and the Ruble’s Slide
The ruble’s decline is rooted in foreign trade dynamics. Import growth, which had initially suffered due to sanctions and volatile oil prices during the early months of the war, has had a detrimental impact on the ruble’s value. The situation has continued to worsen, with the Central Bank recording a current account shortfall in Russia for the first time since the invasion of Ukraine.
Economic Policy’s Role in the Ruble’s Fall
While foreign trade conditions have played a part, Russia’s internal economic policies are also to blame. Economists, such as Alexander Isakov, Bloomberg’s chief economist for Russia and the CIS, argue that import growth is symptomatic of a larger issue. Weak budget policies, characterized by a 20% year-on-year increase in expenditures, and the Central Bank’s monetary policies have contributed to the ruble’s decline. The speed at which interest rates were raised following the wartime shock of 2022 contrasts sharply with previous situations, suggesting an unsteady economic response.
Inflation Escalates as Ruble Falls
The ruble’s devaluation intensifies the issue of inflation, which was already a pressing concern due to heightened demand in an overheating economy and a labor market facing scarcity. While official measures of price growth may exhibit some moderation due to seasonal factors, underlying inflation remains high, posing challenges to consumers.
Shifts in Currency Conversion Policy
As the ruble approaches the critical 100-ruble mark against the dollar and inflation hovers around 10% SAAS, expectations mounted for government intervention. Reports indicated that the government may halt the conversion of oil-and-gas windfalls into currency for the National Wealth Fund for the remainder of the year. Although clarifications have been made regarding this policy, it is apparent that the budgetary rule’s applicability in 2023 is in question.
Budget Rule Shifts and Economic Impact
Russia’s budget rule has been critical in fiscal planning for years, directing extra oil earnings into reserves to combat the “Dutch disease.” In 2023, the law was changed to cap oil earnings at 8 trillion rubles ($83.9 billion) per year, with excess funds reserved for foreign currency investments. While the broad landscape of the Russian budget stays relatively similar, the deviation from established budget norms indicates a dynamic economic climate and needs adaptive policy responses.
Global Implications of Russia’s Economic Changes
Recent changes in Russia’s economic policies and budgetary principles are significant not just for their domestic impact, but also for their worldwide ramifications. While the government’s measures could be read as a reaction to expected high profits in 2023, the requirement for quick modifications highlights the difficulty that Russia’s economic authorities face as they navigate a developing economic landscape. The fall of the ruble serves as a reminder of the intricate and interrelated nature of today’s global economy.