How does the depreciation of the Russian ruble affect the economy in wartime?
The Russian ruble has fallen sharply in recent months, and the Russian Central Bank has intervened to try to halt its collapse. So far, the Russian government has not intervened because the depreciation of the ruble helps its budget. According to the Associated Press.
But the currency’s weakness, meanwhile, is driving up prices for the public, and the government has finally decided to try to stem the decline.
Why does the ruble depreciate?
Russia’s exports decreased, which was mainly reflected in the profits of oil and gas exports, and it also began to import more. Companies or ordinary people importing goods from abroad means that they exchange foreign currencies such as dollars or euros for rubles, which leads to a lowering of the exchange rate.
The Russian trade surplus also shrank, and the trade surplus means the amount of what you sell for what you buy. Previously, the trade surplus was large, which supports the value of the currency, due to high oil prices and lower imports after the invasion of Ukraine.
However, oil prices fell this year, and it became more difficult for Russia to export oil due to Western sanctions, in addition to placing a ceiling on the prices of crude oil and petroleum products, including fuel.
At the same time, levels of imports to Russia have improved nearly a year and a half after the invasion of Ukraine, as Russia managed to circumvent sanctions. It changed some of its trade routes and now passes through Asian countries that do not participate in the sanctions program. And merchants found new ways to ship their goods through neighboring countries such as Armenia, Georgia and Kazakhstan. Russia is also accelerating its defense spending and pouring money into arms manufacturers.
This government spending, combined with the willingness of India and China to buy Russian oil, is helping the economy perform more than some might have thought. The International Monetary Fund said last month that it expects the Russian economy to grow by 1.5% this year.
Why did the central bank raise the interest rate?
A weak currency increases the bad effect of inflation, because it makes imported goods more expensive in Russian currency, so the weak currency is transmitted to ordinary people. Inflation reached 7.6% over the past three months.
Raising the interest rate raises the cost of borrowing, which leads to a decrease in domestic demand for goods, including imported ones. So the central bank is trying to control the domestic economy to reduce inflation. The Central Bank raised the main interest rate from 8.5% to 12% after the Kremlin’s economic advisor criticized the depreciation of the ruble.
Does this mean that sanctions are effective?
Sanctions affect the economy even if it does not lead to its complete collapse. Russian exports, including those made in rubles, declined due to the Western allies’ boycott of Russian oil and the capping of oil prices for non-Western countries that import it. The sanctions prevent insurance companies and shipping companies operating from Western countries from trading Russian oil at more than $60 a barrel.
The boycott and setting a ceiling on the price of oil forced Russia to sell it at reduced prices, and to resort to costly measures such as operating a fleet of tankers indirectly to avoid sanctions.
Although Russia’s oil profits decreased by 23% during the first half of this year, Russia earned $425 million a day from oil sales, according to the Kyiv School of Economics.
The recovery of imports in Russia indicates that Moscow has been able to circumvent sanctions and boycotts. These methods can be expensive and cumbersome, but if someone wants to buy an iPhone or a car made in the West, they can certainly get it.
Is Russia suffering from an economic crisis?
“The ruble’s depreciation is part of it due to the impact of sanctions, but that doesn’t indicate an economic crisis,” says Chris Weaver, CEO of Macro Consulting.
The lower price of the ruble helped the government in terms of the budget, because it means more rubles for every dollar that comes from oil profits or products that Russia sells abroad, and this in turn leads to higher spending on military industrialization and social programs aimed at curbing the impact of sanctions on the Russian people.
And Weaver continued, “They (the Russians) tried to balance between the decline in dollar income coming from the sale of oil and the weakness of the ruble, so that the deficit in spending could be controlled and managed.”
And he adds, “Amidst sanctions and restrictions on the movement of money outside Russia, the central bank controls the exchange rate, and it can tell major exporters when to convert their profits in dollars into rubles.”
Weaver believes that “the weakening of the currency was planned, but it got out of control, so they are trying to control it again.”
Janis Kluge, an expert on the Russian economy at the German Institute for International and Security Affairs, says the Kremlin is unhappy with the ruble’s depreciation. He added, “The chaos resulting from the sanctions at the beginning of the war was worse, but since then, this is the first time that things have been somewhat out of control.”
And he asserts: “Any support for the budget as a result of the ruble’s decline will be matched by an increase in government spending on wages and pensions, which will raise the inflation that occurred due to the devaluation of the currency.” And he points out that «any event that gives the impression that the economy is weak or unstable will not be welcomed by the Russian government. In Russia, they see the exchange rate as the most important indicator of the strength of the economy.
How does this economic situation affect people’s lives?
Inflation from currency devaluation hits the lowest earners hard because they spend more money on basic things like food.
Kellogg says that while raising the interest rate will slow economic growth and moderate price increases, it is unlikely that the government will abandon defense spending on the arms industries, adding: “It is clear that the government’s priority is the war, not the welfare of its people.”
Nikolai Robstov, a 20-year-old Russian student, says he is not disturbed by the depreciation of the ruble, indicating his confidence that things will soon return to normal.
2023-09-01 23:25:27
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