Vladimir Putin has a big problem. A weak ruble could make it harder for Russia to wage war in Ukraine

“The Economist” reminded that on August 14 this year. for one dollar you had to pay over 100 rubles, which was the first such situation since the end of March 2022, i.e. since the first weeks of the attack Russia to Ukraine.

The British weekly stressed that the Russian currency is one of the most depreciating currencies this year, and an increase in interest rates only temporarily halted the decline and the ruble is still well below the level from a year ago, when the exchange rate was around 60 to the dollar. Currently, you have to pay over 93 rubles for one dollar. Since the beginning of 2023, the dollar has strengthened by 27.46 percent. against the ruble.

According to The Economist, interest rate hikes alone are unlikely to stop the currency from declining quickly, which could have implications for the ability to Vladimir Putin to drive war in Ukraine.

The weekly noted that frequent breakdowns exchange rates are triggered by the nervousness of foreign investors or the flight of domestic capital, but the ruble trade, especially against the dollar, remains small because sanctions and capital controls have isolated Russia from the international financial system. Thus, the behavior of the ruble reflects a textbook economic model, acting as a barometer of the relative flow of exports from the country (which yields foreign currency) versus imports (which must be paid for with these revenues).

Since the G7 imposed a $60-per-barrel price cap on Russian oil in December 2022, the value of Russia’s exports has declined. Her dollar-denominated income was 15 percent higher from January to July. lower than in the same period a year ago, which is only partly explained by the lower global oil price. Meanwhile, imports increased sharply due to the ongoing war in Ukraine. In the first seven months of this year, Russia’s current account surplus, a measure of how much more foreign currency a country receives than it spends, fell 86 percent to $25 billion.

As “The Economist” pointed out, these data, on the one hand, suggest that the oil price limit is effective, and attempts to circumvent it by inflating transport costs or using a “shadow fleet” do not compensate for the fact that Russia is forced to sell some oil at a discount. “On the other hand, it suggests that Russia is finding ways to continue importing goods. For example, German exports to Russia’s friendlier neighbors have increased suspiciously,” noted the weekly.

The British newspaper explained that a cheap currency increases the ruble value of revenues from oil exports, but also raises the cost of imports. In June, Deputy Prime Minister Andrei Belousov said that the then exchange rate of 80-90 rubles to the dollar was the best for the country’s budget, exporters and importers. The Economist recalled that when the ruble was much stronger last year thanks to oil revenues, the Russian government presented this as evidence that Western sanctions were failing, but now that confidence has been replaced by anxiety.

According to the British Weekly, Russia doesn’t have many options. As The Economist wrote, the emergency interest rate hike only slightly helped the ruble, and given Russia’s isolation, higher rates are unlikely to tempt speculative funds. Stopping domestic capital from fleeing may bring some effect, but it will only be felt after some time.

Another option is direct intervention in the foreign exchange markets. Russia held foreign exchange reserves of $587 billion in early August, according to official figures, suggesting its central bank has the firepower to raise the ruble’s value if needed. The problem is that about $300 billion of these reserves have been frozen by the West.

“This leaves the government with a choice. It can cut spending, including on the armed forces, to reduce imports. Alternatively, the civilian sector will bear the brunt. Rising inflation and higher interest rates will weaken the purchasing power of ordinary Russians, forcing them to buy less foreign goods. So the fate of the Russian economy will not be decided by the judgments of international financiers, but by the depth of Putin’s aggression.