Ruble collapse: Will it have impact on Russia's war in Ukraine
Due to international sanctions, the Russian ruble is collapsing (photo: Getty Images)
The official exchange rate of the Russian ruble against the US dollar has fallen to its lowest level since March 2022, when Western countries imposed sweeping sanctions in response to Russia's invasion of Ukraine. This record low has been driven by several factors, ranging from new sanctions against Russia to a drop in oil prices per barrel.
Why has the Russian currency depreciated so sharply? How long will this process continue, and will it affect Russia's ability to sustain its war against Ukraine? Read the analysis by RBC-Ukraine for more details.
Contents
- Why is the ruble falling?
- What’s next for the ruble?
- How will the ruble’s decline impact Russia’s war against Ukraine?
As of 30 November, the Central Bank of Russia valued one US dollar at approximately 108 Russian rubles. According to official data from the Central Bank, the ruble has depreciated by more than a third compared to 19 June, when it was valued at 82.62 rubles per dollar.
Why is the ruble falling?
Since the beginning of autumn 2024, the dollar has been steadily strengthening against the ruble. However, even the re-election of Donald Trump as President of the United States did not immediately trigger a sharp drop in the Russian currency. Nonetheless, by mid-November, the ruble had approached the psychological threshold of 100 rubles per dollar, which it officially surpassed on 19 November.
The decline accelerated on 21 November after the United States imposed sanctions on more than 50 Russian banks, including Gazprombank. This financial institution was designated to process payments for Russian energy exports in rubles for countries Russia deemed "unfriendly." Since the start of the full-scale invasion, Gazprombank remained the only bank capable of conducting currency transactions within Russia and internationally.
Oleksandr Parashchii, head of the analytical department at investment company Concorde Capital, noted that a limited influx of hard currency significantly influences the depreciation of the ruble, as many export transactions are now conducted in rubles. As a result, the country is experiencing a dollar shortage, driving up the currency’s value.
However, there is no reliable information yet on the actual scale of the dollar deficit in the country, and neither the government nor the Central Bank has taken sufficient measures to slow the currency’s decline. Seasonal demand for imports, particularly ahead of the New Year holidays when businesses stock up on goods, has further fueled the population’s demand for cash dollars.
"Kremlin spokesperson Dmitry Peskov stated that the ruble’s decline is not a major issue, as most transactions with partners are conducted in rubles. This claim is only partially justified, as although budget revenues in rubles increase, the currency’s depreciation has psychological consequences. Breaking the 100 rubles per dollar barrier causes panic for many, which could undermine trust in the ruble and the authorities," Parashchii explained.
The stability of the ruble is also influenced by global oil prices. Recently, Kazakhstan announced plans to increase oil transit exports bypassing Russia by 13 times. This will be achieved by boosting annual oil deliveries through the Baku–Tbilisi–Ceyhan pipeline from 1.5 million tons to 20 million tons.
Additionally, Brent and WTI crude prices dropped by more than 3% this week under pressure from Israel’s ceasefire agreement with Lebanon’s Hezbollah group. Oil prices also declined following a rise in US gasoline inventories.
Newly elected 47th US President Donald Trump, whose inauguration is scheduled for 20 January 2025, has also expressed intentions to increase oil production, thereby reducing its global price. According to Parashchiy, if Trump follows through with expanding oil and gas supplies, it could further weaken the ruble, although it is too early to predict specific figures.
What’s next for the ruble?
Serhiy Fursa, Deputy Director for Securities Trading at the investment company Dragon Capital, notes that Russia has already adapted to some of the new conditions, which, in his opinion, has helped stabilize the ruble somewhat. In particular, the Central Bank of Russia has suspended foreign currency purchases on the domestic market from 28 November until the end of the year. This is expected to make financial markets less volatile by reducing price and exchange rate fluctuations.
"The increase in the key interest rate is no longer very effective, but on 27 November they decided to stop implementing the budget rule and to buy up the Ministry of Finance’s remaining funds. This has already been done. They won’t be able to do anything else," Fursa asserts.
At the same time, Russia is likely already seeking ways to circumvent sanctions on Gazprombank. However, as the expert explains, this will still lead to higher costs for currency operations, although it will prevent the ruble from a sharp decline. Despite this, Serhiy Fursa refrains from making predictions regarding the possible exchange rate of the ruble at the end of the year.
International sanctions hit the Russian ruble (collage: RBC-Ukraine)
Oleksandr Parashchii agrees that Russians have learned to find ways to mitigate the impact of sanctions on their economy. Moreover, the expert suggests that the exchange rate is unlikely to drop significantly by the end of 2024 and may, in fact, start to recover, unless Russians begin to panic and exchange currency en masse, which, in his opinion, is unlikely to happen.
"The psychological mark of 100 rubles has already been established, but whether the exchange rate can fall below this mark depends on the actions of the government and the Central Bank. If they really want to, they can intervene, but this would be artificial regulation. To stabilize the exchange rate, the Central Bank of Russia will likely have to not only raise the key interest rate but also increase the supply of dollars in the market. This is a real way to reduce the ruble's value, but it may have its own negative consequences," Parashchii explains.
However, according to Reuters, the ruble's decline is not only linked to sanctions but also to the global strength of the US dollar. In comments to the publication, experts predict the likelihood of further devaluation of the Russian currency, including the potential for it to reach 120 rubles per dollar.
How will the ruble's decline impact Russia's war against Ukraine
Next year, Russia will allocate a record 13.5 trillion rubles to continue its war against Ukraine, which accounts for 41% of the entire Russian budget. A significant portion of this amount will be directed towards replenishing destroyed military equipment and armaments in Ukraine. The ruble's decline is expected to increase the cost of imported components used in Russia's military-industrial complex, adding further pressure on the Russian budget.
At the same time, Serhiy Fursa believes that the ruble's fall will actually increase Russia's budget revenue from exports, primarily energy resources. According to him, this will strengthen the financial support for the military apparatus, including payments to soldiers and compensation for families of the deceased.
Additionally, in some cases, Russia has completely abandoned the ruble in transactions with its allies. For example, as reported by the BBC, North Korea provided Russia with weapons and soldiers in exchange for over 1 million barrels of oil.
Fursa explains that the devaluation of the ruble will allow for additional financing of the budget, which is formed in the national currency. On the other hand, this will contribute to accelerating inflation, which he claims is the greatest challenge for Russia's economy.
"We cannot currently provide an exact inflation figure for Russia. The first figure of 8.5% is quite relative, as with the Central Bank's interest rate at 21%, it's unlikely that inflation is truly at 8.5%. Secondly, we don't know how much the devaluation will affect it. Devaluation expectations are much higher; they already anticipate 120 rubles per dollar. This will affect inflation, but how much — who knows," he says.
Russia's Central Bank set an inflation target of 4% for 2024, but the annual inflation rate in October had already reached 8.5%, according to official data. Thus, while the ruble's devaluation helps fill the budget, the Russian population is becoming increasingly impoverished amid the continuation of the war and growing expenditure on it. Alexander Parashchiy notes that inflation may accelerate by an additional 0.5-1% due to the ruble's decline.
CNBC reminds that last year, Russia faced an egg shortage and a more than 40% increase in food prices. As a result, the Russian government had to urgently lift import duties and bring in millions of eggs from "friendly" countries.
However, CNBC emphasizes that social tensions are rising, as many Russians associate inflation with the war. But since it is dangerous for citizens to openly criticize the invasion due to fines or imprisonment, Moscow is managing to control the internal situation. It remains unclear whether the continued increase in military spending and the decline in ordinary citizens' incomes will trigger a social explosion in Russia.
RBC-Ukraine earlier reported that the Russian ruble has weakened against both the US dollar and the Chinese yuan. It has depreciated by more than 24% since August when its decline began. Analysts are expecting further collapse of the Russian currency.
