How the fall of the ruble affects the Russian war economy

A man walks past an exchange house in Moscow after the sharp fall in the ruble (AP Photo/Alexander Zemlianichenko) (Alexander Zemlianichenko/)

He rublethe Russian national currency, has suffered a sharp decline in recent months, and the central bank has stepped in to try to stop it.

Until now, the government had just watched, as the fall favored its budget. But the currency weakness can affect people’s daily life with price increases, and the government has finally stepped in.

Some ruble keys:

WHY DOES THE RUBLE FALL?

Basic economics plays a role, though that’s not all. The Russian exports are falling —as reflected in the drop in revenue from the sale of oil and natural gas— and the imports increase. When importing, people or companies must exchange rubles for dollars or euros. That tends to lower the ruble exchange rate.

He Russia’s trade surplus —which means that it sells abroad more than it buys— has diminished. The trade surplus usually supports the national currency. In previous months, Russia’s trade surplus was large because the invasion of Ukraine caused oil prices to rise and imports to plummet.

But this year the oil prices have fallenand the western sanctionssuch as the caps on the prices of crude oil and derivatives such as diesel, have made sales difficult.

“The significantly lower inflow of foreign currency due to the falling exports is the key driver” from the fall of the ruble, according to the kyiv Institute of Economics.

The increase in imports means that people or companies must exchange rubles for dollars or euros.  That tends to lower the ruble exchange rate.  (Karl-Josef Hildenbrand/dpa)
The increase in imports means that people or companies must exchange rubles for dollars or euros. That tends to lower the ruble exchange rate. (Karl-Josef Hildenbrand/dpa) (Karl-Josef Hildenbrand/dpa/)

Meanwhile, the imports have begun to increase after a year and a half of war as the Russians find a way to evade sanctions. Part of the trade is done through Asian countries that do not participate in the sanctions. And importers have found a way to transport goods across Armenia, Georgia, Kazakhstan and other neighboring countries.

At the same time, Russia has increased its defense spending, for example, with the injection of funds into arms-manufacturing companies. These must import components and raw materialsand part of the government spending finds its way into the pockets of the workers, because Russia suffers from labor shortages.

That government spending, added to purchases of Russian oil by China and India, helps the economy to perform more than expected. He International Monetary Fund said last month that he foresees a growth of the Russian economy of 1.5% this year.

WHY DID THE CENTRAL BANK RAISE INTEREST RATES?

Elvira Nabiúllina, governor of the central bank of Russia (REUTERS / Evgenia Novozhenina)
Elvira Nabiúllina, governor of the central bank of Russia (REUTERS/Evgenia Novozhenina) (Evgenia Novozhenina/)

First of all, for combat the inflation. A weakened ruble exacerbates inflation by making imports in Russian currency more expensive. And the ruble weakness is increasingly transmitted to prices what people pay

The inflation reached 7.4% in the last three monthsand the central bank’s target is 4%.

He rising interest rates make credit more expensive, and that should limit domestic demand for goods, including imported ones. so that the central bank tries to cool the economy to lower inflation.

It raised its benchmark interest rate from 8.5% to 12% in an emergency meeting on Tuesday after a Kremlin economic adviser deplored the fall of the ruble.

DOES THIS MEAN THAT SANCTIONS ARE EFFECTIVE?

Yes and no. Exports have fallen because Western allies have boycotted Russian oil and imposed a cap on the prices of those exports to non-Western countries. The sanctions prevent insurers or transporters — mainly Western ones — from handling Russian oil above $60 a barrel.

The cap and boycott imposed at the end of last year have forced Russia to sell at a discount and take expensive measures such as obtaining a fleet of ghost tankers unreachable by sanctions. AND Russia halted the sale of natural gas to Europehis main client.

The Fuga Bluemarine crude oil tanker anchored in the port of Nakhodka.  Despite the reduction, Russia continued to obtain 425 million dollars a day from the sale of crude oil (REUTERS/Tatiana Meel/File photography)
The Fuga Bluemarine crude oil tanker anchored in the port of Nakhodka. Despite the reduction, Russia continued to obtain 425 million dollars a day from the sale of crude oil (REUTERS/Tatiana Meel/File photography) (TATIANA MEEL/)

The oil revenues fell 23% in the first halfbut Russia continued to obtain 425 million dollars a day from the sale of crude oilaccording to the kyiv Faculty of Economics.

The rebound in imports shows that Russia has known how to evade sanctions and boycotts. It’s more expensive and difficult, but whoever wants an iPhone or a Western-made car can get it.

So the causes of the fall of the ruble were the sanctionshe evasion success of its impact and war itself.

IS RUSSIA IN ECONOMIC CRISIS?

Nosays Chris Weafer, CEO of Macro Advisory Partners. “The fall in the ruble partly reflects the effect of sanctions, but is not indicative of an underlying economic crisis”.

The fall of the ruble has result favorable to the government in various ways. A low exchange rate means you get more rubles for every dollar you earn from selling crude oil and other products. That allows you increase military spending and in social programs to mitigate the impact of sanctions on the Russian people.

“What the central bank and the Ministry of Finance have done in recent months is try to offset the drop in dollar value of oil sales with the weakness of the ruble, so that, therefore, the spending deficit becomes more contained and manageableWeafer said.

The fall of the ruble allowed the government to increase spending on the military and on social programs (Europa Press/Contact/Pavel Byrkin)
The fall of the ruble allowed the government to increase spending on the military and on social programs (Europa Press/Contact/Pavel Byrkin) (Europa Press/Contact/Pavel Byrk/)

In the midst of sanctions and restrictions on taking money out of the country, the ruble exchange rate is largely in the hands of the central bankwhich can advise large exporters when to exchange their dollar earnings for Russian currency.

But when the exchange rate fell below 100, the Kremlin and the central bank said enough is enough.

“The weakness was foreseen, but it has been exaggerated and they want to go back”said Weafer, who expects an exchange rate of around 95 in the coming months, just as the government wants.

WHAT DOES THIS MEAN FOR THE DAILY LIFE OF RUSSIANS?

The inflation caused by the devaluation of the ruble affects the poorest above allwho must spend a higher proportion of their income on food and other basic necessities.

The Travel abroad —enjoyed by a minority living in prosperous cities like Moscow and St. Petersburg—sand they become much more expensive with the fall of the ruble.

In any case, the government responds to popular discontent with repressioneven with jail terms for those who dare to criticize the war.

“The instability of the national currency always has a not very good impact,” said Dina Solovyova, a 51-year-old veterinarian. “Most likely affect ordinary people, because the increase in prices of everything will be inevitable. We will see”.

Nikolay Rubtsov, 20, said he was not overly concerned.

“This is temporary. I think everything will return to normal in no time. I don’t think it can last long,” Rubtsov said in Moscow.

(© copyright 2023 Associated Press)

Keep reading:

Faced with the fall of the ruble, the Bank of Russia raised the interest rate by 3.5 points, up to 12 percent

Putin called for closer cooperation between Russia and the Kim Jong-un regime

Why is the Chinese economy faltering?

Source-www.infobae.com