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According to the Carnegie Endowment, Russia’s currency problems will deepen.
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Researchers at the think tank say the main factors driving the ruble’s decline will remain.
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Russia has few options to keep its currency afloat without causing further damage to its economy.
Russia’s currency battle will not subside as the main factors driving the ruble’s decline will continue for the foreseeable future, according to researchers at the Carnegie Endowment.
In a recent note, the think tank pointed to the ruble’s sharp decline since Russia began its invasion of Ukraine. The coin is down about 27% since February 2022. The group said the decline is likely to continue, with the ruble depreciating further as economic factors continue to weigh on the currency.
“The changing structure of trade flows means the ruble is doomed to weaken further,” researchers wrote this week. “The root cause is the war and the resulting Western sanctions and the militarization of the Russian economy. The country’s financial authorities do not have the power to solve this problem – and they are even afraid to speak about it publicly,” they added later.
Demand for the Russian ruble plummeted at the start of the war in Ukraine, sending the currency to a record low against the US dollar. Russia’s central bank has since taken steps to support the currency, but demand remains weak, largely because Western trade restrictions have prevented Russia from exporting as much as it used to.
Russia’s trade surplus rose 8% year-on-year in the first 10 months of 2024, government data show. Sanctions have also weighed on demand for the ruble in recent months.
In October, the Russian government rolled back restrictions on traders, allowing them to convert only 25% of their earned foreign currency into rubles, down from the previous 50%. That hurt demand for the ruble, while demand for the US dollar and Chinese yuan rose, the researchers said.
Then in November the US imposed sanctions on Russian lenders such as Gazprombank. That prompted traders to buy more foreign currency, researchers said, which also hurt the ruble’s exchange rate.
Russia now appears to have run out of options to support the ruble. The central bank could potentially carry out a market intervention, but Russia’s National Wealth Fund – which would finance such a move – has shrunk from $100 billion in January 2022 to $31 billion by early November.
Central bankers could also raise interest rates to support the value of the currency. However, Russian interest rates are already sky-high, meaning policymakers have limited their ability to raise rates further without potentially causing significant damage to the economy, the researchers said.
Interest rates in Russia have been raised to 21% to curb high inflation. Central bankers would likely have to raise interest rates by another eight percentage points to “ensure impact,” the think tank estimated.
Policymakers have resorted to making verbal statements to avoid panic over the ruble’s decline. Last month, Putin said there was no reason to worry about the ruble’s decline, adding that the situation was “under control,” Russian news media reported.
“As unimaginative as they are, these steps have been enough for now to halt the ruble’s decline. But more downside moves are likely to come. The fundamental reasons for the ruble’s weakness have not disappeared anywhere, and the dynamics of Russian trade flows mean that the currency is destined to falter and inflation will rise,” the Carnegie researchers said.
The Russian economy has held up, but the country faces a host of economic challenges related to the war in Ukraine. Inflation hovered around an annualized rate of 9.32% last week, and the country’s long-term growth prospects are poor, with some economists signaling a potential stagflationary crisis on the horizon.
Read the original article on Business Insider
