Ruble Drops! Russia's Central Bank Acts Urgently

The Russian ruble has plummeted against the dollar, prompting the Kremlin to reassure the public that they will not be affected by the sudden collapse of the currency. However, traders indicate that panic is on the rise.

On Wednesday, the ruble fell below the 110 mark against the dollar for the first time since March 16, 2022. The Central Bank of Russia announced it would cease the purchase of foreign currency to alleviate pressure on the financial markets.

Starting November 28 until the end of the year, the bank stated it will no longer buy foreign currency on the domestic market and will postpone these purchases until 2025. The regulator noted in a statement, “This decision was made to reduce volatility in the financial markets.” According to Russia's budget rules, the Treasury sells foreign currency through the National Wealth Fund to cover shortfalls in oil and gas export revenues or to purchase foreign currency in times of surplus.

Since early August, the ruble has depreciated nearly 35%. Moreover, as investors shift their savings from stocks to deposits, the Russian stock market has declined more than 20% this year, further exacerbating the ruble's depreciation.

Russian Economy Minister Maxim Reshetnikov stated that the ruble's fluctuations are due to a stronger dollar and market concerns about the latest sanctions, rather than fundamental factors, and he expects the ruble to stabilize soon. He mentioned that 82% of Russia's exports and 78% of its imports are settled in rubles and currencies from "friendly" non-Western countries. However, analysts predict that by the end of 2024, the ruble could fall to between 115 and 129 against the dollar.

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While a weaker ruble makes Russian exports cheaper, Russians will have to pay higher prices for imported goods, likely exacerbating the already high inflation in the country. This year's inflation will surpass the Central Bank's expectations, contradicting the goals of its monetary tightening policy. The Central Bank of Russia estimates that a 10% depreciation of the ruble could increase inflation by 0.5 percentage points, meaning the depreciation over the past four months could raise inflation by 1.5 percentage points.

Meanwhile, the Russian Finance Minister dismissed concerns over the ruble's depreciation, claiming it would “greatly benefit exports.” The Kremlin has also sought to reassure the Russian public that they would not feel the effects of the ruble's abrupt collapse. Dmitry Peskov, the Kremlin spokesperson, was nonchalant about the ruble's drop of up to 8.5% on Wednesday, seemingly overlooking analysts’ concerns regarding rising import costs and currency “panic.” He confidently stated:

“Russians will not notice the increase in the dollar exchange rate because they are paid in rubles.”

In response to the ruble's sharp decline, the Central Bank of Russia has opted to suspend currency trading until 2025. However, traders report that panic in the markets is growing. Analysts from BSC Financial Group, based in Russia, remarked:

“In an uncertain environment, the depreciation of the ruble is more akin to panic.”

Some analysts attribute the ruble's decline in part to the Central Bank’s underestimation of the impact of Western sanctions. Dmitry Pianov, First Deputy Chairman of VTB Bank, noted, “We believe that imports of consumer goods account for 25% of the currency basket, and thus the transmission effect is more pronounced. Our model shows that this effect is five times stronger than the Central Bank's estimates.”

Pianov also stated, “My assumption is that sanctions on Gazprombank have a significant impact, as it is no longer a channel for supplying foreign currency to the Moscow Exchange.” He suggested that the Central Bank should focus on stabilizing the currently dysfunctional currency market in the coming days.

Analysts from PSB Bank believe that the Central Bank's latest decision will “moderately support the ruble, but it won’t be enough to bring the exchange rate back to last week’s levels,” predicting continued market volatility. Some analysts also express that in response to the ruble's decline, the Central Bank might raise interest rates from the current 21% (the highest level in at least 20 years) to around 25%.