from ABC news

Russia's rouble has tumbled. What does it mean for the wartime economy and residents?

Russia's rouble has taken a hit in recent months — and now the country's central bank has stepped in to try to halt the slide.

Up until now, the government had stood aside as the declining rouble helped its budget.

But a weaker currency also poses the threat of higher prices for everyday Russians.

Why is the rouble falling?

Russia is selling less abroad — mainly reflected in falling revenue from oil and natural gas — and it's importing more.

People or companies importing goods to Russia means selling roubles for foreign currency like dollars or euros, which lowers the rouble's exchange rate.

Russia's trade surplus (meaning it sells more goods than it buys) has shrunk. Previously, Russia saw a large trade surplus because of high oil prices and plummeting imports after invading Ukraine.

But oil prices have dipped this year, and it's more difficult for Russia to sell its oil due to Western sanctions, including price caps on crude and oil products like diesel.

Meanwhile, imports have started to recover after nearly a year-and-a-half of war as Russians find ways around sanctions.

Some trade has been rerouted to Asian countries that are not participating in sanctions, and importers have found ways to ship goods through nearby countries such as Armenia, Georgia and Kazakhstan.

At the same time, Russia has ramped up defence spending, pumping money into companies that make weapons, for example.

Companies must import parts and raw materials, while some government money winds up in the pockets of workers who buy imported goods.

That government spending, along with the willingness of India and China to buy Russia oil, is helping the economy perform better than many had expected.

The International Monetary Fund said last month that it expects Russia's economy to grow 1.5 per cent this year.

from Washington post

Russia’s Central Bank on Tuesday raised the country’s key interest rate by 3.5 percentage points to 12 percent — a significant increase that came a day after the ruble tumbled to its lowest point in 17 months.

The Russian currency has lost almost a quarter of its value against the U.S. dollar since President Vladimir Putin began an invasion of Ukraine in February 2022, and it has decreased steadily against major world currencies in recent weeks. The economy has been battered by Western sanctions, inflation and an acute labor shortage, caused in part by men fleeing the country to avoid military conscription. All the while, military spending has soared as the war grinds on.

In a statement Tuesday, following its action at an emergency meeting, the Central Bank did not mention the drop in the value of the ruble. Instead, the bank attributed the interest-rate hike to “inflationary pressure” caused by “steady growth in domestic demand surpassing the capacity to expand output.”

While the bank insisted Monday that the sudden depreciation would not harm the country’s overall financial stability, Putin’s economic adviser Maxim Oreshkin appeared to criticize the bank, writing in an op-ed for the state news agency Tass that the source of the weakened ruble was “soft monetary policy.”

“The Central Bank has all the tools to normalize the situation in the near future,” Oreshkin wrote.

Less clear is how the country plans to tackle its widening budget deficit and significant labor shortages, which have contributed to the spike in inflation.

More than 40 percent of Russian industrial enterprises reported a shortage of workers last month, according to a survey — an acceleration of a trend that has been building since September, when Putin launched a nationwide military mobilization to shore up Russian forces in Ukraine.

The Russian economist Sergei Guriev, who is provost of Sciences Po university in France, said the ruble’s fall against major world currencies was “politically important,” since it would be felt immediately by the Russian public.

“The difference between 50 rubles to the dollar in 2020, and 100 today is something every citizen can observe … even those who are convinced and brainwashed by TV propaganda,” Guriev said.

“When the Central Bank increases the interest rate, that also hits Russian borrowers, firms and households with outstanding loans,” Guriev continued. “This will slow down the Russian economy and therefore undermine the increase in the real incomes and purchasing power of Russian citizens.”

The new depreciation marks a reversal, he said, bringing about “a reality where Russia no longer exports a lot and imports very little.” A Western boycott of most Russian oil started to be felt only at the beginning of this year, he added.

Guriev said the recent mutiny against Russia’s military leadership by Wagner mercenary boss Yevgeniy Prigozhin, as well as the expropriation of Western companies still operating in Russia, also contributed to capital outflows and helped to weaken the ruble.

Sergey Aleksashenko, a former Russian deputy finance minister, told The Post that the ruble’s devaluation had been caused by a “growing mistrust in Putin’s economic policy and the country’s future.” The president’s order to replace dollar and euro payments for Russian exports with “friendly currencies” had reduced the supply of currencies needed for imports, he said.

Some economists played down the sudden drop in the ruble, suggesting that it represented a consistent pattern of depreciation and inflation acceleration since the invasion, rather than a spontaneous crisis.

“Perhaps the current acceleration will lead to a tsunami depreciation, but this has not happened in the past,” said Oleg Itskhoki, a professor of economics at UCLA. “So it is not very likely, although not impossible, unless it triggers panic and a mass switch of savings from rubles to dollars by the broader public.”

Guriev also said he did not consider the recent developments to be critically damaging to the Russian economy.

“I think it’s normal that the Russian Central Bank stays committed to its inflation target and raises interest rates when it sees that inflation is getting out of control,” he said. “On the other hand, the question is to what extent further depreciation is possible if the Western coalition can tighten the sanctions pressure on the Russian economy.”

It is not the first time the bank has taken emergency measures during a crisis. At the end of February 2022, just days after the invasion, the bank raised the key rate to 20 percent from 9.5 percent.

And in 2014, after Russia’s illegal annexation of Ukraine’s Crimea and an initial battery by Western sanctions, the bank raised the country’s interest rate to 17 percent from 10.5 percent.